Image Source: UnsplashBack in the heat of COVID-19, I pitched Kura Sushi (KRUS) to our readers. The stock traded around $14/share then, and everyone hated the idea. You may be asking, “why would you invest in a restaurant during COVID-19?” Well, today, Kura Sushi is a $115/share stock. That trade worked well for us. But I think I found an even better setup with GEN Restaurant Group (GENK).I pitched GEN Restaurant on March 13. Since then, the stock is up 62% as insiders gobbled up shares in an already low-float environment.I’ve seen the name circulate on value investing Twitter, and I thought I’d share my write-up publicly. Please note that we/I own shares in GEN Restaurant Group. Do your own work. None of this is investment advice — you know the boilerplate mantra.Kura Sushi is my white whale. I wrote about it during COVID-19, got ridiculed online about it, and said everyone else was wrong. We bought some for the MO port at around $18/share and sold them at $37. We felt like heroes — until it hit $100/share, and I swore I’d never look at the stock chart again (it’s now at $115/share). Fortunately, readers were smarter than us. One reader emailed me claiming “that one trade (KRUS) paid for a few lifetime memberships.” We walked so you can run.But then I found GEN Restaurant. And I realized that this is my redemption story. This is my chance to right all those wrongs of selling Kura Sushi. GEN Restaurant Group is a Korean BBQ-themed all-you-can-eat restaurant. Guests cook their food over open flames and can choose between three main proteins: chicken, beef, and seafood. The price-to-value ratio is incredible. You pay anywhere from $20 to $30 for all-you-can-eat Korean BBQ. Do I need to write anything else? GEN Restaurant Group saves time and money because the guests (i.e., customers) cook the food. The meats come in ready-to-serve packaging from Sysco (SYY). The packaging reduces the need for ample kitchen space. It allows GEN Restaurant Group to fit more tables inside each store, thus maximizing revenue and profit per square foot. The company has 37 stores as of 2023. They plan on adding 10-12 in 2024 with a long-term goal of 250+ in the US. Each restaurant generates ~$5 million in revenue with 40% cash-on-cash returns at 20%+ store-level EBITDA margins. GEN Restaurant Group has no debt, is already profitable, and uses its cash from operations to open new stores. The founder owns 1% of the company, and there’s barely any float left. We get all this for 0.7x EV/Sales and ~6x 2027E EV/EBIT. 

What Makes GEN Restaurant Group Unique: Guest Experience, Food Delivery, & Price
Earlier, I said that GEN Restaurant Group is better than Kura Sushi. I’m not just saying that because I’m bitter (I swear). There are a few reasons why I believe that. First, GEN Restaurant Group’s customers do most of the labor (i.e., cooking the food). This saves GEN Restaurant Group money because they don’t need to hire chefs and outfit a large, expensive kitchen. Kura Sushi has some automation in its restaurants. For example, robots deliver your drinks, and the sushi arrives on a conveyor belt, not via a waiter. But they still have cooks in the back making the sushi and putting it on the trays. So, while this allows Kura Sushi to have smaller kitchens, they still need chefs on the payroll. Second, GEN Restaurant Group’s partnership with Sysco provides a much simpler food delivery system. The food comes pre-packaged two to three times a week. All GEN Restaurant Group has to do is open the package and put the meat on the plate. Think about how much easier training new staff at GEN Restaurant Group is compared to Kura Sushi or other restaurants. Instead of finding a chef who knows how to cook, you just need someone who can open a bag. Then there’s the price point. GEN Restaurant Group is an all-you-can-eat restaurant, with lunch prices ranging from $18-$22 and dinner prices ranging from $29- $30. Sure, Kura Sushi isn’t the world’s most expensive sushi. But you’re still paying $5-7 per roll. And who doesn’t eat more than 5-7 rolls of sushi?GEN Restaurant Group’s pricing also caters to families and large groups. This makes sense because their restaurants look like hibachi grills. Everyone sits around an open flame and cooks their food. It’s perfect for families and doesn’t break the bank. Plus, kids love playing with fire. Everything about this concept makes sense. And it shows in the company’s financials and store-level economics. 

GEN Restaurant Group’s Unit Economics & Financials
Here are GEN Restaurant Group’s unit economics as of their latest investor presentation: 

The company generates positive free cash flow and uses those funds to open new restaurants. For instance, in 2023, GEN Restaurant Group generated $181 million in revenue, $33 million in gross profit, and $22 million in cash from operations. The balance sheet is also clean, with zero debt (outside lease liabilities) and $33 million in cash. GEN Restaurant Group is one of those companies where you want to invest every dollar of FCF into opening more stores because they generate such high returns. $1 invested in a new store returns 40% a year. Like Kura Sushi, there’s a long runway for store expansions. 

GEN Restaurant Group’s Growth Plans: 37 → 250+ Restaurants Nationwide
GEN Restaurant Group has 37 stores as of year-end 2023. According to their investor presentation, they want 10-12 more units in 2024 with a long-term goal of 250+ units nationwide. Can they get there? Yes. If there’s one thing I know about Americans, it’s that we love all-you-can-eat deals. I have no idea when they’ll reach 250. It could take them a decade at 10-12 stores per year. But it doesn’t matter. The point is that they can realistically get there. For reference, Golden Corral, another all-you-can-eat country-style buffet, has 397 restaurants nationwide. This is a good place to discuss why the opportunity exists in the first place. 

Why Does the Opportunity Exist? 
There are a few reasons why this opportunity exists. First, GEN Restaurant Group is a broken IPO with unseasoned public market founders/operators. This isn’t their fault. It’s just part of the growing pains of a new public company, especially a restaurant stock. The stock IPO’d at $18.30/share for a $590 million market cap (3.6x 2023 sales). Since then, it’s declined by 66% as investors surged into Nvidia (NVDA) and Bitcoin. There are also fundamental reasons why you would’ve sold the stock. The company reported ~10% year-over-year revenue growth, which didn’t justify the nearly 4x sales valuation. And gross profit margins declined from 23% in 2021 to 18% in 2023, while net income margin fell from 35% to 5%, respectively. Finally, have I mentioned that it’s a restaurant stock?However, I believe these reasons are temporary. The founders still run the business; this is their first year as a public company. Learning how to set market expectations, engage with shareholders, and pitch your story will take time. Also, the stock now trades at a $300 million market cap or <0.7x NTM sales. That’s a much cheaper valuation than its IPO price of nearly 4x sales, even after accounting for “slower” 10% year-over-year growth. What about the margin decline? Recent earnings calls suggest that the company is investing through the PnL today to enable the business to service more restaurants tomorrow. It’s a short-term pain for long-term value creation. But there’s another twist. Most of GEN Restaurant Group’s stores today operate in California. California is one of the worst, most expensive places to do business. It should see a per-restaurant decrease in COGS and higher gross margins as the company opens more stores outside California.  Then there’s valuation. What if GEN Restaurant Group is Kura Sushi 2.0? How much can we make if we’re right? 

GEN Restaurant Group Valuation: 5-Bagger Potential
Let’s start with my back-of-the-napkin unit economic model (see below). I’m assuming restaurant growth of 10 stores in 2024, 8 stores in 2025, and 7 stores in 2026 (fairly conservative). I also assume $5 million in average annual revenue per store, which aligns with management’s estimates. However, I assume that GEN Restaurant Group gains economies of scale in lowering food prices (buying more for more restaurants), lowering labor costs as it shifts more stores outside California, and lowering SG&A as it spreads marketing across a larger restaurant base. As the model shows, I estimate ~$310 million in revenue by 2026 with ~$35 million in operating profits at 11% margins. The math works out to ~17% annual revenue growth from 2023-2026 and EBIT margins in line with what the company generated historically. Investors will pay 3-5x sales and 15-20x EBIT for GEN Restaurant Group. Just look at how they value Kura Sushi. Image Source: KoyfinHere’s what an EV/Sales valuation looks like. And here’s the EV/EBIT version. On average, GEN Restaurant Group could be worth anywhere from $11.45/share to $31/share or 181% to 500% upside. I want to stress two things. First, I don’t think the revenue and restaurant count growth assumptions are unreasonable. Store count growth is probably conservative. Two, these valuation multiples aren’t outrageous, either. Kura Sushi routinely traded above 5x NTM sales and over 30x gross profits. Texas Roadhouse (TXRH) historically trades at 25x EBIT and 12x gross profits. GEN Restaurant Group will have no problem commanding 3-5x sales and 15-20x EBIT if they can prove the concept works and the growth exists. 

Conclusion: The Benefits Of Pattern Recognition 
There’s a story about Buffett investing $5 billion in Bank of America because “he dreamt it up in the bathtub one morning.” The lesson there isn’t to take more baths. But to understand the power of pattern recognition. Buffett knew bank stocks better than anyone. He knew what a good bank looked like and, more importantly, what a bad bank looked like. So, while the decision to invest $5 billion in BofA seemed to take a nano-second, it was decades of developing pattern recognition tools and mental models. That’s how I feel about GEN Restaurant Group and Kura Sushi. I understood GEN Restaurant Group in what felt like two seconds. But that’s because I did the work on Kura Sushi. I already developed pattern recognition tools and mental models to analyze these situations. That doesn’t mean GEN Restaurant Group will work. But if it looks like a duck and walks like a duck — well, you know the rest.More By This Author:It’s Time To Get Back On The Uranium Bull…Getting Close To A Major Sell Signal… Some Thoughts On Gold & Idaho Strategic Resources