This website presents my analysis of macro economics trends and individual companies.

Saturday, July 30, 2011

Kura Corp. (TYO: 2695)

With the decades long deflation and the recent natural disasters in Japan, stock prices have continued to stagnate as have many of the companies earnings. These circumstances have made Japan potential fertile ground for value hunters and in some cases futile ground for those early entrants (e.g. Jim Grant). One such candidate of a quality company with thriving fundamentals yet a stagnating share price is Kura Corp. (2695).  They are an operator of a low-cost conveyor belt sushi chain with a laser-point focus on efficiency via automation.  From Oct. 2005 to Mar. 2011 the tangible book-value per share has  gone up 102% while the share price has  decline 42%.   During this time, mFCF-ROE (maintaining-free-CF / Equity) has averaged 24% while the sustaining reinvestment needs (e.g. maintenance CapEx) has averaged a low 27% of CFO (cash flow from operations)*.  Such a large free-cash-flow has allowed Kura to self-finance its expansionary CapEx program which doubled their restaurant count from 147 to 280 during this time period.  Based on my analysis I contend that Kura Corp. is a high-quality-value investment since it is a quality company, competent management, leader in its industry, good ROA, and good growth characteristics.

*The assumption here is the effective depreciation life of their PPE which I took to be 15yrs. This number is more conservative than the implied maintenance-CapEx as derived from their financials or 25yr dep life. (As a comparison, McDonald's PPE has a 25yr depreciation life) This figure can be derived by taking the gross-PPE divided by the total number of stores at year-end in order to get a rough estimate of how much one store costs to build. Thus, the (expansion-CapEx) = (gross-PPE / stores) * (# of stores added).

Using the following equations you can get maintaining-FCF:

(Total CapEx) = (m-CapEx) + (exp-CapEx)
(m-FCF) = (CFO) - (m-CapE)

Quantitative Highlights:

The 3yr avg. equity growth rate is currently 14%.

Here 'normalized PE' is the current share price divided by the 8yr average (maintaining-FCF / Equity) * Equity.

Qualitative Factors:

  1. CEO owns +10% of company stock. (see below for other large shareholders)
  2. Kura is the low cost operator in the conveyor-belt sushi business.
  3. Industry: About 4,000 kaiten sushi restaurants operate in Japan with industry-wide annual sales of around $5 billion. Cheap sushi operations owe their existence low-priced imported seafood which cost considerably less than domestically-caught seafood. These imports include farmed Atlantic salmon, whose fatty taste and orange color is said to appeal to women, octopus from Morocco, shrimp from Southeast Asia and sea urchin from South America.
  4.  Competition:
    1. Alkin-Sushiro 
      1. Avg. Gross Margin 50%, 
      2. Avg. Net Margin 1.8%
      3. Avg. ROE = 7%
    2. Genki Sushi (9828)
      1. Avg. Gross Margin = 60%
      2. Net Margin has trended down to below 0%
      3. ROE is negative
    3. Kappa Create (7421)
      1. Avg. Gross Margin 61%, 
      2. Avg. Net Margin 2.3%
      3. Avg. ROE = 13%
    4. Compared to Kura Corp.
      1. Avg. Gross Margin 51%, 
      2. Avg. Net Margin 3.5%
      3. Avg. ROE = 13%
    5. Since Kura clearly has the lowest gross margin and highest net margin, this would support the low-cost producer hypothesis. 
  5. Kura Sushi is currently expanding into the US with 3 restaurants thus far under the banner Kula Sushi.  I have been to the Irvine location and it seats about 40 - 50 people (much smaller than the Japan counterparts which seat nearly 200).  Business is good with wait-times 30 minutes or more during peak hours.
    1. Irvine CA
    2. Costa Mesa, CA
    3. Rowland Heights, CA
  6. Kura Corp. stated growth objectives
  7. Newspaper accounts of Kura Sushi:
 NY Times article from Dec. 30, 2010 on Kura Sushi  

 SAYAMA, Japan — The Kura “revolving sushi” restaurant chain has no Michelin stars, but it has succeeded where many of Japan’s more celebrated eateries fall short: turning a profit in a punishing economy.

Efficiency is paramount at Kura: absent are the traditional sushi chefs and their painstaking attention to detail. In their place are sushi-making robots and an emphasis on efficiency.

Absent, too, are flocks of waiters. They have been largely replaced by conveyors belts that carry sushi to diners and remote managers who monitor Kura’s 262 restaurants from three control centers across Japan. (“We see gaps of over a meter between your sushi plates — please fix,” a manager said recently by telephone to a Kura restaurant 10 miles away.)

Absent, too, are the exorbitant prices of conventional sushi restaurants. At a Kura, a sushi plate goes for 100 yen, or about $1.22.

Such measures are helping Kura stay afloat even though the country’s once-profligate diners have tightened their belts in response to two decades of little economic growth and stagnant wages.

Many other restaurants and dining businesses in Japan have not fared so well. After peaking at 29.7 trillion yen in 1997, the country’s restaurant sector has shrunk almost every year as a weak economy has driven businesses into price wars — or worse, sent them belly-up. In 2009, restaurant revenue, including from fast-food stores, fell 2.3 percent, to 23.9 trillion yen —20 percent below the peak, according to the Foodservice Industry Research Institute, a research firm in Tokyo.

Bankruptcies have been rampant: in 2009, 674 dining businesses with liabilities of over 10 million yen went under, the highest number in the last five years, according to Teikoku Data Bank, a credit research company.

In November 2009, Soho’s Hospitality, the company behind celebrity restaurants like Nobu and Roy’s, filed for bankruptcy. Roy’s is now run by another company, while Nobu’s chef, Nobu Matsuhisa, has opened a new restaurant elsewhere in Tokyo with Robert De Niro.

Along with other low-cost restaurant chains, Kura has bucked the dining-out slump with low prices and a dogged pursuit of efficiency. In the company’s most recent fiscal year, which ended on Oct. 31, net profit jumped 20 percent from the same period a year earlier, to 2.8 billion yen.

In the last two months alone, Kura has added seven stores.

“If you look at the restaurant business, consumers are still holding back because of employment fears and falling incomes, and there’s no signs that will change,” said Kunihiko Tanaka, Kura’s chief executive, who opened Kura’s first sushi restaurant in 1995. “Amid these worsening conditions, our company feels that consumer sentiment matches, or is even a tail wind” to the Kura business, he told shareholders earlier this year.

The travails of Japan’s restaurant industry, and the changes in Japanese dining habits, may be among most visible manifestations of how Japan’s “bubble economy” excesses in the 1980s have given way to frugal times since the bubble burst in 1990.

With wages weak — average annual private sector pay has fallen 12 percent in the last decade, to 4.05 million yen, or about $49,300, in 2009 — the Japanese now spend less on eating out. An average single-person household spent 163,000 yen on dining in 2009, 27 percent less than in 2000, according to detailed budget surveys compiled by the Ministry of Internal Affairs.

In a survey by Citizen Holdings, the watchmaker, of 400 men in their 20s to 50s, the average time spent at cafes and restaurants plunged from 7 hours and 52 minutes a week in 1990 to 2 hours and 25 minutes in 2010.

An aging population is also depressing restaurant sales. More than one-fifth of Japan’s population is already over 65, and surveys indicate that older people tend to eat out less. The population is also shrinking, reducing the restaurants’ potential customer base.

Meanwhile, Japanese companies have cut back sharply on their entertainment expenses, further hurting restaurant sales. Total corporate spending on dining and entertainment has halved from a peak of 9.5 trillion yen in 1991 to 4.8 trillion yen in 2008, according to data from the National Tax Agency.

“The restaurant industry here is so linked to the state of the economy, and that’s why we’re seeing this decline,” said Munenori Hotta, a food service industry expert at Miyagi University in Japan. “In this climate, even top restaurants are having to moderate their prices to keep attracting customers,” he said.

Japan’s dining-out boom had its roots in the 1970s and 1980s, as incomes grew and rural populations flocked to big cities. So-called family restaurants brought cheap, Western-style food to the masses flourished in that era. So did American fast-food chains, which were considered novel at the time. Kentucky Fried Chicken opened its first restaurant here in 1970, followed by McDonald’s in 1971.

At the other end of the price range, a new generation of wealthy Japanese savored imported French wines at lavish restaurants. By 1986, there were 503,088 restaurants across Japan, according to records from the Internal Affairs Ministry. That was nearly double the number from 15 years earlier — and was more restaurants than now operate in the United States, which has more than twice the population of Japan.

After the bubble burst in 1990, new low-cost restaurant chains that offered pizzas for as little as 400 yen, or $4.86, started to spread across Japan, and restaurateurs spoke with alarm of ready-made, convenience-store meals that were siphoning off sales.

In the depths of the slump, in 1995, Mr. Tanaka started a company based on serving quality sushi on the cheap.

His idea of using conveyor belts to offer diners a steady stream of sushi on small plates was not a new one; an Osaka-based entrepreneur invented such a system in the late 1950s. But Mr. Tanaka set out to undercut his rivals with deft automation, an investment in information technology, some creativity and an almost extreme devotion to cost-efficiency. In Japan, where labor costs are high, that meant running his restaurants with as few workers as possible.

Instead of placing supervisors at each restaurant, Kura set up central control centers with video links to the stores. At these centers, a small group of managers watch for everything from wayward tuna slices to outdated posters on restaurant walls.

Each Kura store is also highly automated. Diners use a touch panel to order soup and other side dishes, which are delivered to tables on special express conveyor belts. In the kitchen, a robot busily makes the rice morsels for a server to top with cuts of fish that have been shipped from a central processing plant, where workers are trained to slice tuna and mackerel accurately down to the gram.

Diners are asked to slide finished plates into a tableside bay, where they are automatically counted to calculate the bill, doused in cleaning fluid and flushed back to the kitchen on a stream of water. Matrix codes on the backs of plates keep track of how long a sushi portion has been circulating on conveyor belts; a small robotic arm disposes of any that have been out too long.

Kura spends 10 million yen to fit each new restaurant with the latest automation systems, an investment it says pays off in labor cost savings. In all, just six servers and a minimal kitchen staff can service a restaurant seating 196 people, said a company spokesman, Takeshi Hattori.

“Its not just about efficiency,” Mr. Hattori said. “Diners love it too. For example, women say they like clearing finished plates right away, so others can’t see how much they’ve eaten.”

Traditional sushi chefs have not fared so well, however. While the overall market for belt-conveyor sushi restaurants jumped 42 percent, to 428 billion yen, in 2009 compared with 2003, higher-end sushi restaurants are on the decline, according to Fuji-Keizai, a market research firm.

“It’s such a bargain at 100 yen,” said Toshiyuki Arai, a delivery company worker dining at a Kura restaurant with his sister and her 3-year-old son. “A real sushi restaurant?” he said. “I hardly go anymore.”

    Gizmo Article from Jan. 5, 2011 on Kura Sushi

    Kura, a sushi chain in Japan, has found a way to efficiently run their restaurant and make a profit in Japan’s highly completive economy; with robots.

    Instead of having traditional sushi chefs, they have been replaced by robots that quickly make sushi and place them on conveyer belts that bring them to customers. And instead of having restaurant managers, Kura uses three control centers that monitor Kura’s 262 restaurants with live feed monitors. These allow them to monitor anything from a shortage in salmon rolls to the gaps in between sushi plates.

    It is this efficiency that has allowed Kura to stay running even through others have struggled in Japan’s stagnant economy. In fact, Kura has resisted the economic slump with profits that rose 20 percent from last year, to 2.8 billion yen.

    Naturally, the rest of the store is automated as well. Diners interact with touch screens to order their meals which are quickly delivered to them via conveyer belts. The sushi robot forms rice morsels which are topped with fish shipped from a central plant. After they are finished, diners put there finished plates in table-side slot where they’re quickly scanned to their bill. The dishes are then automatically cleaned and sent back to kitchen for use again. The bar codes on the bottom of plates also allow the restaurant to keep track of how long sushi has been circulating for too long and if so is quickly taken of the line by robotic arm.

    The connectedness of everything allows the order prioritization as well. The touch screens at the table are connected with a computer screen that greets customers at the entrance as well a main system computer. It calculates how heavy the traffic as and sends sushi to those who have been sitting and are hungry faster than those who have slowed down and are less of a priority.

    An added bonus for diners is that if they put 5 plates into the slot, they have a chance to win a slot machine kind of prize.

    “I usually eat 8 or 9 plates by myself, but since springing for just one or two more plates gives me a go at the slot game, I'd usually end up doing it. That’s just a buck or two from me, but multiply that across tens of thousands of customers, and that probably is a significant bump in revenue.”

    It costs about 10 million yen ($120,000) to install the automated system into their restaurants says company spokesman, Takeshi Hattori. However the investment pays off in labor cost savings. “In all, just six servers and a minimal kitchen staff can service a restaurant seating 196 people.”
    The automated system has also allowed completive prices with a plate of sushi for only 100 yen ($1.22)
    “It’s such a bargain at 100 yen. A real sushi restaurant? I hardly go anymore.” 


    Based on my analysis I consider Kura Corp. to be a high-quality-value investment (i.e. quality company, good ROA & growth potential with strong competitive advantage) yet trades at half to a third of what it ought to.


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    About Me

    Los Angeles, California, United States
    Chris Rutherglen is a scientist and engineer by profession and pursues financial & investment analysis on the side. In 2011, he completed lever 3 of the CFA program.