Kura Sushi reported its third quarter results Tuesday after market and they were largely in line with the company’s pre-release announcement in June. As CEO/president Hajime Jimmy Uba summarized, the quarter fell short of expectations. The combined reports seem to have caused some trepidation among investors, as share prices fell to $50.09 Wednesday, from nearly $120 in March.
Total sales for Q3 were $63.1 million, representing a comp growth of 0.6% and traffic growth of 0.3%. This is compared to comp growth of 3% in the prior quarter. Sales declines began in mid-April and were “sudden and unexpected,” Uba added. “We believe the current headwinds are macro driven and transitory.”
Uba pointed to California specifically for some of Kura’s comp deterioration. The company initially expected that the wage increases that went into effect April 1 would produce a tailwind because those increases didn’t impact Kura, but rather QSRs. Uba said he thought it would force concepts that were impacted to aggressively raise prices and therefore generate more interest in Kura. That has not been the case.
“What we have seen instead is a general perception that restaurants as a category have become expensive, introducing industry-wide pressures regardless of a given restaurant’s relative value,” he said, adding that March comps systemwide were 7.3%, while California comps were 14.1% in March, prior to the wage increase.
“Looking at that versus where we landed for the full quarter, you can see how different our outlook would have been in the early weeks of April versus the time we gave our pre-release,” he said. “As we entered the latter half of April, once we saw the sales deceleration, that was like a sucker punch. We generally don’t make a habit of providing monthly comps, but to illustrate the point we’re trying to make, we’re providing some special context.”
CFO Jeff Uttz added that California’s deceleration was “completely unexpected.”
Notably, Kura was also slightly impacted by cannibalization as the company grows through an infilling strategy. Eventually, the company expects to benefit from that strategy, however, and is relying on a new site selection process to ensure this expectation.
The company is adjusting to the quarter by focusing on its core strategic goals – at least 20% annual unit growth, G&A leverage and “operational excellence.” Uba added that there is an opportunity for better cost management through hourly labor, as well as reductions in pre-opening expenses, like lower travel costs as markets are infilled. There is also bullishness on the development side; Kura opened four locations in Q3 and recently opened number 14 on the year. There are currently six units under construction with expectations for at least 20%-unit growth in fiscal 2025.
And, for tech, the company has completed the rollout of mobile ordering, while its new rewards program generated higher frequency at about 1.3 transactions a month. Kura is now testing tableside mobile ordering, while its robotic dishwashers are “in the final mass production model.” Further, the company is prepping for a reservation system already in use in its Japan system. Uba calls it a massive upgrade, allowing customers to have more control of their experience and allowing them to identify the busiest times.
Kura recently hired a vice president of marketing to help cut through the noise in California and elsewhere. That said, the company will not aggressively discount or make massive investments in media buys “to try to get home runs,” but will rather focus on “consistent, cost-effective base hits.” That means showcasing value propositions like large portion sizes.
“We can’t predict how long macro pressures will last, so we think it’s prudent to prepare for the long term,” Uba said. “We can’t control the macro environment, but we can control our offering. We know guests like sushi and don’t make sushi at home. We just need to be the restaurant they immediately think of when they want to go eat sushi.”
Contact Alicia Kelso at [email protected]
