Over the past six months, Kura Sushi’s shares (currently trading at $69.83) have posted a disappointing 8.5% loss, well below the S&P 500’s 6% gain. This was partly due to 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? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Kura Sushi Not Exciting?
Even though the stock has become cheaper, we're swiping left on Kura Sushi for now. Here are three reasons we avoid KRUS and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
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 10.4%, meaning it lit $10.40 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 $27.54 million of cash over the last year, and its $187.4 million of debt exceeds the $50.7 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 isn’t one of our picks. After the recent drawdown, the stock trades at 40.4× forward EV-to-EBITDA (or $69.83 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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