Apparently, Wall Street likes it when profits best expectations—particularly when those expectations have been hammered by a brutal inflationary environment.
Kura Sushi USA, the U.S. operator of a Japanese chain of conveyor belt sushi restaurants, on Friday watched its stock price rise more than 34% at one point after the company reported strong sales and profits in the quarter ended May 31.
Same-store sales in the quarter, the company’s fiscal third period, rose 28% when compared with the same period in 2019. On a single-quarter basis, its same-store sales rose 65%.
Profitability, meanwhile, was stronger than expected. The company said that its cost of goods sold decreased by 30 basis points, while labor actually improved by 230 basis points in the period. “While we had previously faced staffing headwinds as a result of ongoing staff quarantining during the second quarter, we are pleased to say that we have had no such issues during our third quarter,” Hajime Uba, Kura Sushi USA’s chairman and CEO, said on the company’s earnings call Thursday, according to a Sentieo transcript.
“We remain very close to achieving optimal staffing levels,” he added.
Lower-than-expected food and labor costs, coupled with strong sales, led to strongly improving profits. The company said it had an operating margin of 22.5% in the quarter, up 470 basis points from the previous period.
For Kura Sushi, the result has been something of a recovery in its stock price—though it’s notable that, even after an increase in value by more than a third, its stock value remains lower than where it was at the beginning of the year. Kura’s stock price was down 32% as of close on Thursday. Its performance Friday helped it recover most, but not all, of that.
Investors have been concerned about the impact of inflation on restaurant profits, not to mention the potential impact of a recession on sales. Restaurant stocks have lost about 25% of their value so far this year and are down well over 40% compared with their 52-week highs. Both numbers are far higher than broader stock markets indexes.
Early indications from the spring quarter have assuaged at least some of those concerns. Olive Garden owner Darden Restaurants said last month that its profit margins last quarter were actually better than pre-pandemic levels.
Kura Sushi is only a fraction of Darden’s size—the company operates just 37 locations and generated $38 million in revenues in the quarter.
Uba noted that the company’s customers have higher incomes, which can help the chain overcome economic concerns such as high gas prices, which tend to depress sales among lower-income consumers more.
It’s also worth noting that Kura used higher prices to overcome higher costs. “We’ve been extremely important in that we really haven’t seen any sort of softening in consumer sentiment,” Uba said through Benjamin Porten, Kura’s investor relations manager. He noted that the company raised prices by 1.8% in March, yet check averages grew 4.9%. “So we know that our guests are not managing their check sizes,” Uba said through Porten.
He added that traffic hasn’t been hurt by the higher prices. Kura took another 6% of price in July to match inflation seen in June. “The goal isn’t to drive margin by taking price,” Porten said. “It’s really just to keep our labor and COGS consistent. The growth in margin is just from greater sales leverage combined with that seasonable boost we get” this time of year.
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