Lackluster 4Q for Kona Grill

Kona Grill Inc.’s ( KONA - Snapshot Report ) fourth-quarter 2012 earnings of 10 cents per share beat the Zacks Consensus Estimate by 11.1% and the year-ago earnings by 25%. Efficient cost containment resulted in earnings increase despite a choppy sales scenario.

Total restaurant sales in the quarter were $23.0 million, down 0.9% year over year. However, the results were in line with the Zacks Consensus Estimate. The downside in sales can be traced back to macro issues like higher television viewership of the national political debates prior to the presidential election in November and also the uncertainty regarding the election, which deterred consumers from dining out.

Hurricane Sandy resulted in store closures for quite some time. Adverse weather during the holidays also marred sales to some extent. Same-store sales (comps) increased 10 basis points (bps), excluding the impact of the Arizona store remodel, driven by higher average guest check partially offset by a slight decline in guest traffic.

Restaurant operating profit margins declined 200 basis points to 17.1% in the reported quarter due to higher proportion of occupancy-related costs, labor expenses and cost of sales to revenues. However, lower restaurant operating expense compensated the decline in margins partially.

However, the company’s operating margins witnessed an increment of 60 bps to 3.7%, owing to a considerable decline in general and administrative costs as a portion of revenues.

Full-Year Update

Kona Grill’s earnings per share were 59 cents, up 127% year over year. Restaurant sales in 2012 increased 2.5% to $96.0 million on the back of a 2.7% increase in comps achieved due to a 2.5% increase in guest traffic.

Store Update

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

Guidance

For the first quarter of 2013, the company expects total restaurant sales of $23.9 million, down 1.2% year over year. Management stated the decline in sales will be due to one less operating day in the upcoming quarter compared to 2012, which was a leap year.

The guidance indicates same-store sales growth to be flattish. Comps will face tough year-over-year comparison due to weather issues. Also, the shift of Easter into the first quarter this year versus second quarter last year will adversely impact sales by about 40 to 50 basis points. Earnings per share are expected to range between 9-10 cents per share.

Our Take

Although Kona Grill has managed to beat earnings estimate and meet the revenue estimate in the reported quarter, slowdown in sales remains a concern. It has been facing sluggish sales environment for quite some time. Nevertheless, its bottom line increased due to the company’s efficient cost-control measures.

Although Kona Grill is resorting to several strategies like offloading unprofitable locations, restaurant remodeling and promotions in an attempt to accelerate traffic, any notable impact is yet to be noticed. An anemic economy and stiff competition will continue to pose challenges going ahead.

Kona Grill currently retains a Zacks Rank #4 (Sell). However, others players in the same industry, which look attractive at current levels include Red Robin Gourmet Burgers Inc. ( RRGB - Analyst Report ) , carrying a Zacks Rank #1 (Strong Buy) and AFC Enterprises Inc. ( AFCE - Snapshot Report ) and Burger King Worldwide Inc. ( BKW - Snapshot Report ) carrying a Zacks Rank #2 (Buy).