If you have watched Kura Sushi USA (NASDAQ: KRUS) and are waiting for a good time to buy, this is it. The company is a high-quality restaurant player, growing at a solid double-digit pace, but faces headwinds impacting the share price. The headwinds are cyclical and will recede; when they do, the company’s operating leverage will produce an accelerated rebound in the share prices. That’s if there isn’t a meme-quality short squeeze first.

The primary headwind is macroeconomic conditions related to inflation and higher interest rates. The FOMC is expected to reduce the headwind soon because inflation is cooling. The first cut may not happen as soon as the market hopes, but the odds are high that the committee will cut at least once this year and several times next. This means an economic pivot is at hand, and Kura Sushi’s rebound will quickly follow. 

Kura Sushi Navigates Challenging Times and Grows Its Business

Kura Sushi’s results are mixed compared to the analysts' estimates but solid in light of the trends, and there is a catalyst for improvement in the macroeconomic outlook. The company reported $63.08 million in net revenue for a gain of 28.1%, as expected, and sustained at the pace of nearly 30% it has run for many quarters. The increase is due to the compounded effect of store count and comp sales, which grew by 0.6%. Store count rose by four in Q3, and the plan is for fourteen by year-end to bring the count to over 660. The company continues to target 20% annual store count growth in the long term. 

Margin is the bad news. The company experienced rising costs despite an improvement in food and beverage costs. The 80 basis point improvement in F&B was offset by increased labor costs, ad spending, promotions, fees, and “other.” The net result is $4,000 in net profits or break-even results compared to last year’s profits. The guidance was another non-starter for the market. The company reiterated its outlook for revenue and earnings, including solid top-line growth but losses for the year. 

Kura Sushi Trades at a Deep Value

The analysts' response to Kura Sushi’s results is negative and weighing on the market today, but it provides an opportunity down the road. The response was to cut their price targets, but the market’s reaction was overblown. MarketBeat.com tracks four revisions from eight analysts, each a price target reduction. The range includes a new low target of $64, well above the current action. The $64 target offers a 20% upside for the stock, and the consensus is another 3000 basis points higher. 

Institutions can be expected to buy with shares near their current levels. The institutions bought this restaurant stock on balance in Q1 and Q2 and for eight of the last nine quarters, aligning with the uptrend in share prices. The uptrend is volatile, producing large swings, but that should be expected from low-float issues often plagued by lower trading volumes, reduced liquidity, and increased volatility. Kura Sushi’s float is little more than 50% of the share count.

Kura Sushi has High Short Interest and Is a Short-Squeeze Target

High short interest is one of the issues ailing Kura Sushi’s stock price. The short interest was over 25% in mid-June and is unlikely to have fallen since. This means the share price may remain under pressure until a catalyst emerges. The risk for bearish traders is that the market is in a buying zone now and may begin to rebound soon. In that scenario, short-covering will aid the upswing in price action and may result in a squeeze. If this market experiences a short squeeze, it could quickly rise to the consensus $87.