Short Interest is Rising at Kura Sushi USA

Short interest data can be a very effective risk management tool. If a stock is being targeted by short sellers, there is often major risk to the downside.

In this report, we are going to discuss the short interest data on Kura Sushi USA Inc (KRUS:US). Kura Sushi is a Japanese restaurant chain that operates in the US. Established in 2008, it operates a revolving sushi service model, enabling guests to control the variety, portioning, check size, and pace of their dining experience. It is listed on the Nasdaq and currently has a market cap of approximately $728.42 million.

Rising Short Interest

Looking at the data on Kura Sushi, we see several red flags.

One is the fact that short interest is relatively high. At present, 719,360 KRUS shares are on loan. That represents about 19.48% of the free float.

Another red flag is the fact that the number of shares on loan is rising. At the end of last year, when the stock was trading under $50, the number of shares on loan was 389,142.

Since then, the number has increased by 84.85%. That’s a significant increase. Research shows that a sharp rise in short interest is often followed by a period of underperformance.

High Valuation

Now, there are a couple of factors that the short sellers could be looking at here.

One is the stock’s valuation. Currently, the forward-looking price-to-earnings (P/E) ratio here, using earnings estimates for the year ending August 31,2024 is about 187. That’s high. That multiple doesn’t leave any room for error.

Another is the resilience of the company’s business model in the face of a recession. Recently, the company forecast sales of $185 million to $188 million for 2023. That would represent growth of 32% at the midpoint. However, the discretionary nature of the business means that there is some uncertainty here. In a recession, this is the kind of business that could be impacted negatively as consumers reign in their spending.

Given the rising level of short interest here, we think caution is warranted towards the stock at present. The data suggests that many institutional investors expect the stock to fall.