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Kona Grill Inc.’s (KONA - Snapshot Report) second-quarter 2013 adjusted earnings of 19 cents per share beat the Zacks Consensus Estimate of 15 cents by 26.7% and the year-ago earnings per share of 18 cents by 5.6%. An improved sales environment coupled with margin expansion benefited earnings in the quarter.

Total restaurant sales in the quarter were $25.8 million, up 3.2% year over year. The upside in sales can be attributed to improved comparable store sales (up 2.5%). Higher average guest check due to a pricing action undertaken in Mar 2013 benefited comparable store sales in the quarter.

Also, several food-based promotional initiatives and the success of happy hour tests helped sales in the quarter. Sales marginally beat the Zacks Consensus Estimate of $25 million and the company-provided guidance of $25.3 million.

Restaurant operating profit margins grew 120 basis points to 20.6% in the reported quarter attributable to lower cost of sales, labor expenses and restaurant operating expenses ratio.  The purchase initiatives implemented over the past 12 months led to the reduced food costs. The price increase taken earlier in the year eased some pressure on liquor costs related to the company’s wine-based promotional initiative.

Store Update

At quarter-end, Kona Grill owned and operated 23 restaurants in 16 states. The restaurateur expects to open 2 new units in the fourth quarter of 2013.

Third Quarter Guidance

For the third quarter of 2013, the company expects total restaurant sales of $23.9 million, flat year over year. The guidance indicates same-store sales growth to be around 1%. Restaurant operating margin is guided in the range of 18.0%–18.5%.

Restaurant operating expenses are expected to increase as a percentage of sales in the second half of the year owing to the renovation of its Scottsdale and San Antonio locations. Adjusted earnings per share are expected to be around 17 cents per share.

Our Take

Kona Grill is gradually moving in a positive direction. The company managed to beat earnings estimate for the seventh straight quarter. Although persistent slowdown in sales so far remained a concern, the restaurateur delivered year-over-year sales growth this time.  

Several of its key strategies like offloading unprofitable locations, restaurant remodeling and promotions seem to yield results. However, an anemic economy and stiff competition will continue to pose challenges going ahead. Moreover, the company’s sales are becoming more promotion-driven. In such a scenario, any promotional failure can mar the company’s quarterly results.

Kona Grill currently retains a Zacks Rank #3 (Hold). Others players in the same industry, which look attractive at current levels include Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), Domino’s Pizza Inc. (DPZ - Analyst Report) and Famous Dave's of America Inc. (DAVE - Snapshot Report) all of which carry a Zacks Rank #2 (Buy).
 

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