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 Chao ($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 2018, 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.

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.

Here’s a look at Kura’s financial picture:

• System sales: $63 million
• Average size (square feet): 3,200
• Average-unit volume: $3.5 million
• Average guest check: $19.15

Sales mix

• Lunch: 45 percent
• Dinner: 55 percent
• Alcohol: 2.3 percent
• Off-premises: 1.5 percent

Openings

• 2019 (estimated by Saleh): 5
• 2018: 3
• 2017: 3

More on tech

Kura’s restaurants range in size from 1,600 to 5,600 square feet, with an average of 3,200 and seating capacity of 100 guests through booths and bar seats. It’s already a rather nimble concept in terms of real estate.

The guest seating is designed around and adjacent to the revolving and express conveyor belts that contain an assortment of small platers and deliver selected menu items, respectively.

Kura has a proprietary “Mr. Fresh” dome that covers the items. It opens when customers select the plate. Also, unlike some similar concepts out there, Kura’s tables feature a slot for disposing of individual plates so they don’t stack up. Perhaps this helps some customers keep ordering since they’re not constantly reminded of how much they already indulged.

“The restaurant design and curated selection allows guests greater control over their dining experience, allowing them to control the time spent, pace, portions, menu assortment and amount spent. We believe this flexibility is one of Kura’s most compelling aspects, enabling a wide range of guests given the variety of dining experiences possible,” Saleh said.

And here’s another differentiating piece of technology that is often a detractor from conveyor belt concepts in general: Kura uses RFID technology to determine how long a particular dish has been on the revolving conveyor belt. A robotic arm discards it if it hasn’t been purchased in the last two hours.

As Saleh notes, the use of digital ordering technology and conveyor belts to deliver food “reduces the number of tasks and servers required in the restaurant,” which could stem the labor costs crippling sit-down brands nationwide, especially in some Northeast and West Coast markets.

Servers instead periodically check on guests, take and deliver beverage orders, clear plates, and bring the final check.

Additionally, food preparation is cut back at Kura with equipment like vinegar mixing machines, automatic rice washers, and sushi robots. The kitchen automation and robotics eliminate the need for expensive sushi chefs, Saleh said, which historically restrained the growth of U.S. sushi concepts due to cost and availability.

That’s a point that can’t be understated. It also ensures consistency across units in a food segment that struggles mightily with the ideal.

“We believe the evolution of this technology could one day include the ability to pay at the table, allowing servers to cover more tables and focus on beverage sales, particularly alcohol sales,” Saleh wrote.

A spend-based rewards program is currently in tests at two locations. Customers accumulate points based on purchases and, once a certain threshold is reached, they receive a discount voucher.

Where to grow?

Kura crawled out of the growth gates. The second unit opened nearly two and half years after the first. Kura progressed to six store openings in the first five years—all of which were in California. Development centered on Southern California before moving to the northern part of the state. Major Texas markets arrived in 2016; Georgia in 2017; and, most recently, Illinois and Nevada. A restaurant debuted in the Chicago suburbs last November and Las Vegas this July. The brand should sit around 28–29 locations by the end of fiscal 2020.

To date, most units are in retail centers, typically end-cap or in-line locations in strip malls and shopping complexes. Saleh said target demographics include a population of 100,000 within a 3-mile radius, over-index of households below 50, above-average household income (about $70,000), and an Asian population share of 7 percent.

“The concept’s relatively small unit size and largely self-service model, which allows customers greater control over their dining time and likely results in faster table turns, both contribute to this high productivity.” — BTIG analyst Peter Saleh.

“The latter criteria is intended to help sales by locating in markets with an established customer population but hasn’t always correlated with its highest unit volumes,” Saleh wrote.

“With a nascent footprint, we see significant opportunity for further unit expansion,” he added.

The roadmap looks as follows: 300 or so restaurants across 70 markets. That would mean 89 additional locations in existing states and roughly 185 in new ones. If Kura grows at 20 percent annually, as management stated, it would more than double in the next five years.

“While we recognize the challenges in taking a restaurant concept from a quasi-regional to national scale, we believe Kura’s unique nature, best-in-class unit metrics and international track record will work to its advantage,” Saleh said.

He added that Kura appears well suited to develop on the East and West Coasts given population levels, targeted demographics, and higher seafood consumption. It has spots planned for Fort Lee, New Jersey, and Bellevue, Washington, in 2020, and Washington D.C. likely in 2021–2022.

In the interim, though, there is ample white space in its existing DMAs and fresh areas on the East Coast to sustain growth without having to stretch for locations where seafood suppluy would be stressed or pricey, Saleh said.

Kura said it believes Southern California, Northern California, and Texas can each support 20-plus restaurants.

In regards to the supply chain, it’s likely where Kura will face the greatest obstacle as it moves inward. The brand’s largest commodities are salmon, tuna, yellowtail, snapper, and scallops, which collectively account for 60–70 percent of commodity expense. About 75 percent of Kura’s food and beverages come from JFC International (47 percent of purchases), and Wismettac Asian Foods (28 percent). Both have been partners with Kura since 2009.

“They also have extensive U.S. seafood and food supply operations with facilities on the East and West Coasts, Chicago, Texas and the Southwest. Given their extensive distribution network, we believe these suppliers are capable of supporting’s Kura’s unit growth over the near- and medium-term with the only potential complication being modestly higher shipping cost,” Saleh said.

How to classify Kura?

Saleh rightfully pointed out that it’s tough to generate a peer group for Kura. It falls somewhere between casual dining and fast casual on several characteristics. The scale potential feels fast casual. The sit-down format and economic drivers, however, are akin to casual dining. The result is average-unit volumes squarely in the middle of the casual-dining range but one of the smaller real-estate footprints in the game at 3,200—lower than the typical 5,000–7,500 box, and slightly larger than the mid 2,000 figure of fast-casual leaders.

Average check around the $19 mark is much closer to sit-down brands, though, but with very high sales productivity.

Here’s a slice of that picture:

Average-unit size (from BTIG estimates and company documents):

• Kura Sushi: 3,200
• Cheesecake Factory: 10,950
• Chili’s: 5,150
• Olive Garden: 7,700
• Red Robin: 5,100
• Texas Roadhouse: 7,350

And corresponding average-unit volumes (as of last fiscal year:

• Kura Sushi: $3.5M
• Cheesecake Factory: $10.7M
• Chili’s: $2.9M
• Chipotle: $2M
• Olive Garden: $5M
• Red Robin: $2.8M
• Texas Roadhouse: $5.2M

Average check (BTIG estimates and company documents as of last fiscal year)

• Kura Sushi: $18.37
• Cheesecake Factory: $22.60
• Chili’s: $15.70
• Chipotle: $13
• Olive Garden: $19
• Red Robin: $12.92
• Texas Roadhouse: $17.09

Kura has a pretty wide AUV range right now—$2–$5 million—making up that $3.5 million figure. That’s not uncommon for new concepts. Restaurants often open with high sales volumes and soar during honeymoon periods that can stretch six months, Saleh said.

“Sales volumes in the first year can be very volatile owing to the honeymoon period, varied brand awareness and market factors but typically begin to stabilize in the second year and build from there,” he wrote. “This initial volatility will likely continue as units open in markets like New York, Boston and Washington DC with high population density but less brand awareness before steadying as awareness and mix of established markets grows.”

As mentioned earlier, Saleh estimated Kura’s new unit cash-on-cash returns at 40–45 percent once restaurants reach maturity, “one of the strongest return profiles in the industry owing to the high sales productivity and modest development cost.” Maturity usually is achieved by the third year, he added, as sales volumes build, restaurant margins progress, and initial operating inefficiencies wear off.

Compare the new unit economics (BTIG estimates and company documents)

Kura Sushi

• Average unit sales: $3.5M
• Restaurant margin: 20 percent
• Restaurant profit: $700,000
• Development cost: $1.6M
• Cash-on-cash return: 44 percent

Cheesecake Factory

• Average unit sales: $10.7M
• Restaurant margin: 17 percent
• Restaurant profit: $1.819M
• Development cost: $8.5M
• Cash-on-cash return: 21 percent

Chipotle

• Average unit sales: $2M
• Restaurant margin: 18.7 percent
• Restaurant profit: $374,000
• Development cost: $750,00
• Cash-on-cash return: 50 percent

Domino’s

• Average unit sales: $1.15M
• Restaurant margin: 12.2 percent
• Restaurant profit: $140,300
• Development cost: $300,000
• Cash-on-cash return: 47 percent

Olive Garden

• Average unit sales: $5M
• Restaurant margin: 21.7 percent
• Restaurant profit: $1.085M
• Development cost: $4M
• Cash-on-cash return: 27 percent

Texas Roadhouse

• Average unit sales: $5.2M
• Restaurant margin: 17.4 percent
• Restaurant profit: $904,800
• Development cost: $3.3M
• Cash-on-cash return: 27 percent

Wingstop

• Average unit sales: $1.1M
• Restaurant margin: 17 percent
• Restaurant profit: $187,000
• Development cost: $380,000
• Cash-on-cash return: 49 percent

Saleh’s estimate of $1,100 in sales per square foot for Kura would be $300 more than Chipotle and $100 more than Cheesecake Factory. The sales productivity dwarfs that of Olive Garden and Texas Roadhouse, he added, but is roughly double more traditional concepts like Chili’s and Red Robin. “The concept’s relatively small unit size and largely self-service model, which allows customers greater control over their dining time and likely results in faster table turns, both contribute to this high productivity. This latter point about customer turnover and faster table turns is demonstrated by looking at transactions per square foot, where Kura is also ahead of most competitors by a wide margin,” he said.

Productivity break down (BTIG estimates and company documents):

Kura Sushi

• Average unit sales: $3.5M
• Average size: 3,200
• Sales/square foot: $1,094
• Average check: $18.37
• Annual transactions: 190,528
• Transactions/square foot: 59.5

Cheesecake Factory

• Average unit sales: $10.7M
• Average size: 10,950
• Sales/square foot: $978
• Average check: $22.60
• Annual transactions: 473,451
• Transactions/square foot: 43.2

Chili’s

• Average unit sales: $2.85M
• Average size: 5,150
• Sales/square foot: $553
• Average check: $15.70
• Annual transactions: 181,529
• Transactions/square foot: 35.2

Chipotle

• Average unit sales: $2M
• Average size: 2,500
• Sales/square foot: $800
• Average check: $13
• Annual transactions: 153,846
• Transactions/square foot: 61.5

Olive Garden

• Average unit sales: $5M
• Average size: 7,700
• Sales/square foot: $649
• Average check: $19
• Annual transactions: 263,158
• Transactions/square foot: 34.2

Red Robin

• Average unit sales: $2.785M
• Average size: 5,150
• Sales/square foot: $541
• Average check: $12.92
• Annual transactions: 215,557
• Transactions/square foot: 41.9

Texas Roadhouse

• Average unit sales: $5.2M
• Average size: 7,350
• Sales/square foot: $707
• Average check: $17.09
• Annual transactions: 304,272
• Transactions/square foot: 41.4

What does this all mean? Saleh breaks it down.

“In our view, this high transaction productivity indicates strong demand from customers, providing the concept authority to build more restaurants,” he wrote. “Conversely though, we are also concerned that this high productivity limits future traffic gains as restaurants don’t have much available capacity at peak times. We believe this means traffic gains will have to be generated from off-peak hours, which is generally hard to accomplish in casual dining, or through off-premises sales. We believe the majority of Kura’s restaurants are at or near capacity during lunch and dinner, meaning same-store sales will have to be driven by menu pricing and check growth.”