This Hot Restaurant Chain Is Going in Circles

There's a fair amount of fear when it comes to investing in restaurant stocks these days. Inflationary fears and economic concerns are shooing away potential customers. Even some of the market's historical leaders are posting unimpressive store-level growth and paring back expansion plans.

It's against this industry indigestion and general uneasiness that Kura Sushi (NASDAQ: KRUS) is bucking the trend. The chain of restaurants featuring revolving conveyors that bring sushi plates and other Asian fare to patrons' tables is posting strong comps. Kura also remains committed to growing its footprint by roughly 20% annually. Yet on Wednesday -- with the market trading higher -- the shares are trading sharply lower after the company posted decent financial results.

Image source: Getty Images.

Stop, drop, and sushi rolls

Not to be mistaken with the publicly traded oncology specialist that beat it to the namesake ticker symbol, Kura has had a quiet but successful life in the market. The stock has more than quadrupled since pricing its initial public offering (IPO) at $14 seven summers ago.

This week's stock-rattling fiscal second quarter seems decent at first glance. Sales rose 23% to $80 million, just above the $77.6 million analysts had targeted ahead of the report. A healthy 8.6% jump in comps and growing its store count from 73 to 84 over the past year will get you to top-line growth north of 20%. Kura Sushi raised its full-year guidance.

The bottom line isn't as slick as the top, but things are improving. The $0.04-a-share adjusted loss it posted for the fiscal second quarter is less than a third of the adjusted red ink it posted a year earlier. Analysts see the chain turning profitable on an annual basis in the new fiscal year that starts at the end of August.

Kura is experiencing some tariff pain on imported food items, but it's largely been able to pass it along to customers. The jump in comps was fairly evenly split between an uptick in traffic and the amount that diners were spending.

The chain is raising its revenue guidance for the current fiscal year. It now sees $333 million to $335 million in fiscal 2026. This is just a $2 million increase at the midpoint, perhaps disappointing since it beat top-line expectations by slightly more than that in the fiscal second quarter itself.

The biggest drag on Wednesday's stock performance is primarily the news that its CFO is leaving the company. Outside of CEO, the chief bean counter is the one post that investors like to see remain steady for a rapidly expanding concept.

Putting growth back on the menu

Investing in restaurant stocks can be challenging. Kura seems to be doing nearly everything right. It already has a differentiated concept. You can probably name a dozen restaurants near you with friendly sushi chefs, but Kura is hard to duplicate. This isn't the old-school conveyor belt system that has been popular across Asia and Europe for decades.

Kura offers a high-tech twist to a familiar cuisine. Customers can place orders for hot items and customize other offerings through kiosk screens at every table. At some locations, a second conveyor line can deliver special orders quickly, stopping directly at the hungry customer who ordered. The plates are tracked for billing from a disposal chute at each table. A robot can seat guests and deliver drinks and other non-food essentials to your table. The food comes quickly, but you can't call this a fast-food stock.

It's not cheap to set up, and that is more of a moat than an obstacle. Kura spends an average of $2.5 million to open a new location, but the concept averages roughly $4 million in sales per location.

Kura also has the scale to create creative partnerships for special themed offerings. It has teamed up with the companies behind Hello Kitty, One Piece, Kirby, Demon Slayer, and even Peanuts in the past to woo anime fans and younger families to its busy tables. There will be hiccups along the way, but the stock is still beating the market over the past year despite Wednesday's slide and trading closer to its 52-week low than its high. The pullback feels like a buying opportunity, but like the conveyor belts circling the eateries, with an array of plated options, you're welcome to wait until something you like comes your way.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.