Kura Sushi USA (KRUS, Financial) saw its shares drop by 24% following its Q3 revenue guidance announcement. The Japanese restaurant chain expects Q3 revenues to be around $63.1 million, reflecting a 28% year-over-year growth and a 10% sequential growth. However, this fell short of analyst expectations.
- KRUS also lowered its FY24 revenue outlook to $235-237 million from the previous $243-246 million. This suggests a weaker Q4 (August) forecast, with Q4 revenues estimated at $63.1-65.1 million, below analysts' expectations of over $70 million.
- Q3 comparable restaurant sales guidance is only +0.6%, down from +3.0% in Q2 (February) and +3.8% in Q1 (November). This declining trend raises concerns about Q4 comps, which are expected to be weak based on overall revenue guidance.
- CEO Hajime Uba acknowledged that Q3 results did not meet internal expectations, primarily due to unexpected softness in the California market. However, KRUS believes these challenges are temporary and expects consumer strength to normalize over time.
- On a positive note, KRUS anticipates healthy margins, with Q3 restaurant-level operating margin projected at 20% of sales, slightly better than Q2's 19.6% margin.
- The guidance was surprising given KRUS's recent growth and positive outlook. The weak Q3 comps were unexpected, especially since KRUS had expressed optimism about April during its Q2 call. It appears that comps weakened later in April and possibly May.
Investors are clearly disappointed with the Q3 and full-year guidance, which also suggests a weak Q4. The primary issue seems to be the softness in California, where KRUS has significant exposure. Additionally, there's been a noticeable trend of consumers cutting back on dining out, particularly among lower-income groups and at fast food restaurants.
McDonald's (MCD, Financial) and Taco Bell introduced value options this week. Also, McCormick (MKC, Financial) reported that more people are cooking at home. These trends likely impact KRUS as well. Given the current environment, we remain cautious about restaurant stocks as earnings season approaches.
