Kura Sushi USA is a sensation in the stock market and on social media, soaring to a billion-dollar market value and winning a cult following with robot servers and toy prizes at its restaurants.

Yet a recent rocky stretch for the shares suggests that investors are starting to wonder whether Kura can live up to the excitement.

The U.S.-based offshoot of the famous Japanese chain that uses touchscreen menus, robots and other technology to serve low-priced dishes, Kura shares have surged more than sixfold since their 2019 debut, climbing from an initial public offering price of $14 to $88.55 as of Friday’s close.

The company briefly boasted a market capitalization of more than $1 billion in July, when the shares hit a high of $108.92. It now trades at 680 times earnings, the 11th highest multiple in the Russell 2000 and well above the average of 29.6 for the small-cap index.

Investors have mostly been patient with Kura, which has booked losses in 12 of the past 18 quarters, including its latest. During the COVID-19 pandemic, the chain bet that diners would embrace how its restaurants limit contact between workers and customers, and pounced on the chance to secure inexpensive long-term leases when competitors were struggling.

Chief Executive Officer Hajime "Jimmy” Uba said in an interview in Tokyo that opening new restaurants at such an uncertain time faced skepticism at Kura’s parent company, and he had to apologize to executives for high costs and steep losses, but he wanted to seize what he saw as an opening.

"I just thought, this is our chance,” he said. Kura has more than doubled its store count since early 2020 and brought on executives with experience managing fast-growing chains like Shake Shack and Panda Express to help.

Now, there are signs that some market participants want more proof that Kura’s gambit will pay off. After hitting the July high, Kura was felled by a broader market slump that sheared off more than half its value by mid-November. Then the shares took off again from that low point, surging 70% — though they remain 18.5% below the July peak.

Different experience

Kura Sushi USA, based in Irvine, California, first opened in the country in 2009 and now has locations in 16 states and Washington, D.C., with plans to have outlets in at least 30 states, Uba said.

Sushi is popular in the U.S. but it is hard for many people to make it at home, said Devin Holland, a senior analyst at Ranger Investment Management, which has a 1.68% stake in the firm. Kura is filling a niche in a market crowded with burger and burrito chains, she said in an email.

As Kura has grown, so has the hype, with diners sometimes enduring seven-hour waits to try its automated sushi-serving machines and dishes under plastic domes brought to the table on a revolving belt. When diners finish a plate, they slide it through a slot that takes it to be washed. It’s "eat-tertainment,” said Stephens analyst Joshua Long, who rates the stock the equivalent of a buy.

A Kura Sushi restaurant in Tokyo in January 2020. Despite the sheen the company has acquired, some analysts have said that Kura Sushi’s valuation is outsized for a company that only made $1.5 million in profits in its last fiscal year.
A Kura Sushi restaurant in Tokyo in January 2020. Despite the sheen the company has acquired, some analysts have said that Kura Sushi’s valuation is outsized for a company that only made $1.5 million in profits in its last fiscal year. | Reuters

Kura’s prices are roughly half those of a typical U.S. sushi restaurant, Long said. For $3.20 to $3.85 a serving, diners can choose plates with two pieces of sushi, single pieces of exotic fare such as sea urchin or snow crab, or colorful rolls with sauces and fried crumbles.

Along with the food, a machine that dispenses a toy reward when a table finishes 15 plates has kept diners coming back — and posting about their visits online. Videos of the toys, such as trinkets of characters from cartoon series like Peanuts or We Bare Bears, have led to TikTok and YouTube posts that boosted sales at some stores, Uba said. The toys can sell at a steep markup on eBay.

The Peanuts collaboration has been so popular that Snoopy figures decorating the sushi domes "would go mysteriously missing,” Chief Financial Officer Jeff Uttz said on Kura’s most recent earnings call.

"You really can’t get higher praise than that,” he said, adding that he wasn’t encouraging guests to steal.

Melani Martinez, who was visiting a Kura Sushi in New York on a recent Friday night, said the game-like experience keeps her coming back. Martinez and three friends trek from New York to an outlet in the New Jersey suburb of Fort Lee once a month.

Future growth

Despite the sheen the company has acquired, some analysts have said that Kura Sushi’s valuation is outsized for a company that only made $1.5 million in profits in its last fiscal year.

Muted consumer spending and a slowing economy could put the shares under pressure, Citigroup analyst Jon Tower wrote in a note earlier this month. William Blair analysts said that a concentration of locations in California and Texas are also a risk.

Those concerns are surfacing as more investors have begun to bet against the stock, wary of its lofty earnings multiple. Roughly 11% of Kura Sushi shares were on loan to short-sellers in December, according to Nasdaq data, up from about 3% in January of last year.

In the U.S., Kura Sushi is filling a niche in a market crowded with burger and burrito chains.
In the U.S., Kura Sushi is filling a niche in a market crowded with burger and burrito chains. | Reuters

Stephens’s Long brushed off the short bets, saying that while the stock is expensive, Kura is pushing revenue into its growth plans.

Kura has produced operating restaurant margins of 19.5% of sales in its latest quarter, while administrative costs as a percentage of revenue have fallen year-on-year for the past 11 quarters, "rare for such an early-stage company with so few units,” Barclays analysts wrote in a note.

More savings are expected when automated dishwashers are rolled out in the spring, relieving workers of a detested task. Labor costs were 31.6% of sales and took up the largest share of operating costs in the latest quarter. "In an environment with higher labor costs, this insulates the company from some of the inflationary pressures that the restaurant industry broadly faces,” Holland said.

Uba said investors more frequently ask him about how fast Kura Sushi can open new stores than about increasing near-term profits.

"The first 10 years in the U.S. was more like a warm-up period, readying for explosive growth,” he said. "We’ve spent the past four years proving to everyone that it is indeed a model that works.”