Kona Grill Lags on Both Counts

Zacks

Kona Grill Inc. (KONA) recently reported third quarter 2012 earnings of 11 cents per share, which lagged the Zacks Consensus Estimate of 13 cents but improved substantially from the year-ago earnings of 6 cents per share.

Total restaurant sales in the quarter were $23.9 million, up 0.4% year over year. However, the results marginally missed the Zacks Consensus Estimate of $24.0 million. The upside in sales can be traced back to a 0.2% increase in same-store sales, buoyed by 2.3% growth in guest traffic, offset somewhat by lower average guest check which was affected by the Happy Hour initiatives.

Same-store sales growth of 0.2% in the quarter compared with 10.6% in the third quarter of 2011 and 2.3% in the previous quarter. A back-to-school season makes the third quarter seasonally weak.

Impact of a fire breakout at Troy, Michigan restaurant in early May was still felt on comps as sales at Troy unit were down mid-single digit in the third quarter. Before the catastrophe, comps were up double-digits at that unit. Comps in September were marred by the mega-events like the Olympics, political conventions and the addition of Thursday night NFL games.

Restaurant operating profit margins expanded 20 basis points (bps) to 18.5% in the reported quarter attributable to lower occupancy-related costs and other operating expenses based on total revenue. However, labor expenses and cost of sales provided a partial offset by increasing a respective 90 bps and 50 bps to 33.7% and 27.4%.  

The company’s operating margins witnessed a further increment of 240 bps to 5.7%, owing to a considerable decline in general and administrative costs as well as depreciation and amortization as a portion of revenue.  

Store Update

At quarter-end, Kona Grill currently owns and operates 23 restaurants in 16 states.

Liquidity

Kona Grill ended the quarter with current assets of $8.2 million and long-term obligations of $12.4 million.

Share Repurchase

During the third quarter, Kona Grill bought back 192,000 shares at an average cost of $8.13 per share as part of the company's $5 million stock repurchase program which commenced in May 2012.

Guidance

For the fourth quarter of 2012, the company expects total restaurant sales of $23.1 million. The guidance considers approximately 1% same-store sales growth excluding the impact of super-storm Sandy and remodeling at one of its units. Earnings per share are expected to be 9 cents per share.

For fiscal year 2012, the company expects to more than double its earnings at $4.7 million. Its income from continuing operations is anticipated to surge 123% year over year to $5.2 million.

Our Take

The key takeaways from the reported quarter reveal that Kona Grill has missed estimates on both lines and witnessed a slowdown in sales, yet its bottom-line increased due to the company’s efficient cost control measures. The company entered the third quarter by exercising a 1.1% pricing on new menus after 14 months. However, even higher pricing amid an anemic economy could not boost Kona’s revenue in the reported quarter.

Kona Grill, which competes with the likes of Jamba Inc. (JMBA) and BJ’s Restaurants Inc. (BJRI), also embarked upon several strategies like offloading unprofitable locations, restaurant remodeling and promotions in an attempt to create awareness and accelerate traffic. We maintain our long-term ‘Outperform’ recommendation on the stock.
 

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