Kona Grill Swings Back to Profit

Kona Grill Inc. (KONA - Snapshot Report) recently reported third quarter 2011 adjusted earnings of 8 cents per share, which beat the Zacks Consensus Estimate by 2 cents and improved substantially from the year-ago loss of 3 cents. On a GAAP basis, net income was 6 cents a share versus a loss of 5 cents in the comparable quarter last year.

Total restaurant sales in the quarter were $23.8 million, up 15.9% year over year. The whopping rise in sales can be traced back to a 10.6% increase in same-store sales, buoyed by higher average guest check despite a menu price rise of approximately 3.3% and a 2.5% growth in guest traffic. Incremental revenue from the Baltimore, Maryland location that was opened during the fourth quarter of 2010 also strengthened the comparison.

Comparing same-store sales, the 10.6% rise was quite strong as opposed to zero growth in the third quarter of 2010 and a 9.1% increase in the previous quarter. This also represents the eighth consecutive quarter of sequential improvement in same-store sales. Average weekly sales for all 23 Kona Grill restaurants were also solid year over year.

Restaurant operating profit margin increased 420 basis points (bps) to 18.3% in the reported quarter attributable to cost containment efforts. The company’s expenditures were palpably less, with cost of sales, labor expenses, occupancy costs and restaurant operating expenses falling 60 bps to 26.7%, 160 bps to 32.8%, 60 bps to 7.3% and 130 bps to 14.8%, respectively based on total revenue.

Store Update

During the quarter, the company shut down two underperforming restaurants in West Palm Beach, Florida and Sugar Land, Texas. Kona Grill currently owns and operates 23 restaurants in 16 states.

Financial Position

Kona Grill ended the quarter with cash and cash equivalents of $7.3 million and long-term obligations of $14.2 million.

Outlook

For the fourth quarter of 2011, the company expects total restaurant sales to remain in the $21.5–$22.3 million range. The guidance reflects an expectation of approximately 4% same-store sales increase. Net income per share is expected to range between a loss of one penny to 2 cents a share.

Our Take

We remain impressed with the company’s continuous market share gain in a highly competitive bar and grill segment. Guest frequency also remains unscathed by pricing action taken in June to offset higher commodity costs. The company is also in an expansion mode with two openings anticipated for 2012 and more for 2013.

The company also embarked upon several strategies like offloading unprofitable locations, restaurant remodeling and promotions in an attempt to create awareness and accelerate traffic.

Kona Grill, which competes with the likes of Jamba Inc. (JMBA">JMBA) and Benihana Inc. (BNHN">BNHN), currently, retains a Zacks #1 Rank, which translates into a short-term Strong-Buy rating. We also maintain our long-term Outperform recommendation on the stock.

Read the full analyst report on BNHN

Read the full analyst report on JMBA

Read the full analyst report on KONA