Kura Sushi USA bucked recent history when it hit the stock market August 1. The 23-unit revolving sushi-style restaurant raised $41 million in its initial public offering—the first for a restaurant chain since Wingstop and Fogo de Chao went public in 2015. Shares of Kura, a subsidiary of 400-unit Kura Japan, popped 40 percent that first day, and traded for $24.76 Tuesday morning, near its all-time high of $28.16. The brand sold $2.9 million shares of stock ($14 per share) to get going. The IPO was a big deal for restaurants considering past results. A few brands that went public from 2013–2015 have since returned to the private sector, including Papa Murphy’s (acquired by MTY Food Group for $190 million), the aforementioned Fogo de Chão ($560 million sale), and Zoes Kitchen ($300 million to Cava). Del Frisco’s is headed there soon, too, after being dealt to L Catterton for $650 million. Some others, like Potbelly, have struggled to generate consistent sales growth. But there are reasons, beyond simple stock optimism, to bet on Kura’s success. Peter Saleh, BTIG analyst, set a $30 price target for the company Monday in a note. He credited a “unique, technology-enabled concept,” and said it’s “demonstrated customer appeal and significant unit growth potential.” “We believe Kura’s high sales volumes, impressive new unit returns and sales productivity that rivals the strongest in the industry are all evidence the concept is resonating with consumers,” Saleh wrote. Kura is currently posting average-unit volumes of roughly $3.5 million. Its same-store sales have climbed in 10 of the past 11 quarters (only exception was Q3 2018). Comps rose 3.8 percent in 2017, 2.9 percent in 2019, and 4.9 percent year to date so far this year. The chain boasts an average check around $19 despite featuring a 140-dish menu that prices most of its items sub-$3. Saleh said Kura is only just approaching the runway. In the coming years, he sees the brand building a wider geographic footprint capable of boosting that AUV figure through a greater focus on off-premises and alcohol, “both of which are notably below peers,” he said. Thirteen of the brand’s locations are in California. Seven are in Texas. One each in Georgia, Illinois, and Nevada. “The concept is relatively young and geographically concentrated in the U.S. but is still able to generate industry-leading unit metrics and new unit returns,” Saleh said. “These strong unit metrics and consumer appeal should enable the concept to expand beyond its existing markets, providing significant unit potential across the country.” Proceeds from the public offering will approach $46.7 million. Net of an estimated $7.5 million in expenses, Kura should have about $39.2 million of available proceeds. The company said it plans to use $3.1 million of that to pay off its credit facility balance. The rest ($37.1 million) will go to unit growth and other corporate expenditures. Guests not only grab off the belt, but can also pick items from an established menu through tableside ordering screens. This helps build check and let customers control the experience.

And speaking of growth . . .

Kura has set a target of nearly 300 U.S. locations. Saleh said it has the unit economics to get there. If so, Kura would track a robust 20 percent-plus annual growth rate. BTIG estimated Kura’s sales per square foot and transactions per square foot to be close to $1,100 and 60x, respectively. That would slot the brand among the strongest in the business and close to double that of a typical casual-dining concept. Strong sales productivity and smaller unit sizes also translate to new unit returns in the 40–45 percent range, Saleh said—another top tier result. We’ll explore this further later. Building on the off-premises/alcohol whitespace, Kura currently only mixes off-premises as 1.5 percent of sales compared to the low-to-mid teens its casual-dining peers report (Olive Garden, for example, is 14.5 percent, Chili’s 13 percent, and Red Robin 12.5 percent). Alcohol mix is 2.3 percent, also well below most high-single digit competitors, and among the lowest in the industry. Saleh said Kura appears resistant to convenience trends. “While the concept is still young, we have noticed wait times of up to several hours at some of its oldest locations for lunch and dinner, suggesting consumers are willing to wait to have the Kura experience,” he wrote. “We believe this suggests strong demand for the concept, supporting the unit growth ambitions, but also limiting potential traffic growth at peak hours and making the focus on off-premises and alcohol attachment necessary for incremental sales.” “Given the concept’s authentic Japanese cuisine and heritage, we believe greater emphasis and promotion of its curated alcohol offering [sake, Asahi, etc.] could go a long way to increasing that mix,” he added.

Where could this go?

Kura is scheduled to report Q4 earnings in mid to late October, but Saleh offered up some base case assumptions. The brand is pacing to grow by six and seven units in 2020 and 2021, respectively. Same-store sales he pegged at 5 percent, year-over-year, in Q4, mostly driven by average check, leading to 6 percent for the full year. In 2020, he predicts 2.5 percent comps gains. However, there’s added upside if areas like New York, Seattle, and Boston prove comparable to or better than current restaurants, which would buoy investor confidence in expansion. On the cautious side, Saleh wrote, same-store sales could face kickback from traffic declines or pricing resistance. As always, costs might reduce earnings generations. Some of those new markets could underperform as well and stymie expansion ambitions.

Only time will tell on those notes.

Yet here’s a slice of why the arrow is pointing up for Kura. Saleh used the word “unique” 11 times during Monday’s note. In addition to being a revolving conveyor belt sushi concept, Kura has adopted differentiated technology developed by its sizable parent company. Guests not only grab off the belt, but can also pick items from an established menu through tableside ordering screens. Prices range from $2.25–$6.90 for that option, and include everything from gyoza to tempura to ramen and desserts. Prepared items on the revolving conveyor belt (where the $3 price point average comes into play) account for about 60 percent of sales. Items ordered from the menu makes up the rest. Kura is also entirely company owned and has no current intentions to franchise, “largely due to the complexity of operations and proprietary technology developed by its parent company,” Saleh said. The U.S. arm was established in 2008 and opened its first California locations in Irvine the following year. – fsrmagazine.com.