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Kura Sushi USA (KRUS -24%) is trading sharply lower today after providing downside revenue guidance for Q3 (May) last night. This Japanese restaurant chain expects Q3 revs to be about $63.1 mln, which would still represent yr/yr growth of +28% and sequential growth of +10%. However, analysts were looking for more.

• In addition, KRUS lowered its FY24 revenue outlook to $235-237 mln from $243-246 mln prior guidance. The new full year guidance reduction was by more than the Q3 downside, which implies a guide down for Q4 (Aug) as well. Doing the numbers and based on the guidance ($108.87 mln in 1H + $63.1 mln in Q3), we compute Q4 revenue guidance at $63.1-65.1 mln, whereas analyst expectations are just north of $70 mln.
• Not surprisingly, the Q3 comparable restaurant sales guidance was not great either at +0.6%. That is below the +3.0% comp in Q2 (Feb) and +3.8% in Q1 (Nov). We never like to see comps trending lower like this. We did not get full year comp guidance, so we are not sure what to expect for Q4. However, based on the total revenue guidance, we suspect comps will be weak again in Q4.
• In terms of what happened, we appreciate the candor from CEO Hajime Uba. Basically, he conceded that KRUS's Q3 results did not meet internal expectations. This was due largely to unanticipated softness in the California market. The silver lining is that KRUS believes these sales pressures are transitory and consumer strength will normalize over time. Its view on the long-term potential of Kura Sushi remains unchanged.
• Another silver lining is that KRUS guided to pretty healthy margins. The company expects Q3 restaurant-level operating margin to be approximately 20% of sales. This is a bit better than Q2's 19.6% level. The higher sales level in Q3 relative to Q2 likely helped with margins.
• This guidance kind of takes us a bit by surprise. KRUS has been showing good growth lately and has been lauded as an early stage, attractive restaurant concept. So this was a bit of a stumble. Also, on the Q2 call, KRUS did not guide for Q3 comps, but did say it was happy with how April was shaping up. So this weak comp surprised us a bit. Granted, KRUS's Q2 report was on April 4, so the month was just starting. However, it seems that comps may have weakened later in April and perhaps May.

Overall, clearly investors are disappointed with this Q3 and full year guidance, which portends a weak result in Q4 as well. We did not get a lot of detail, other than California, where KRUS has high exposure, was weak. However, there has been a lot of press on consumers pulling back on eating out, especially lower income consumers and at fast food restaurants.

McDonald's (MCD) and Taco Bell just rolled out value options this week. Also, spice giant McCormick (MKC) reported earnings yesterday and said people are cooking at home more. We suspect KRUS is feeling the pinch from this trend as well. KRUS is a small player, but given the totality of recent events, we are cautious on restaurant names as we head into earnings season in a few weeks.