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Kona Grill a Dime Ahead

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Kona Grill Inc. recently reported first quarter 2012 earnings of 13 cents per share, which comprehensively beat the Zacks Consensus Estimate by 10 cents and improved substantially from the year-ago loss of a penny per share.

Total restaurant sales in the quarter were $24.2 million, up 8.6% year over year. The upside in sales can be traced back to a solid 8.7% increase in same-store sales, buoyed by higher average guest check and 6.4% growth in guest traffic. The sales enjoyed a 1.5% pricing that was taken last year.

Quarterly same-store sales growth increased 8.7% from growth of 7.6% in the first quarter of 2011 and 7.8% in the previous quarter. This also represents the sixth consecutive quarter of positive same-store sales. The comfortable winter weather throughout the country pushed the quarterly same-store sales leading to a double-digit sales increase in the bar and patio.

Restaurant operating profit margin increased 480 basis points (bps) to 19.9% 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 110 bps to 26.9%, 90 bps to 32.9%, 110 bps to 6.3% and 170 bps to 14.0%, respectively, based on total revenue.

Store Update

Kona Grill currently owns and operates 23 restaurants in 16 states.

Financial Position

Kona Grill ended the quarter with current assets of $7.3 million and long-term obligations of $13.6 million.


For the second quarter of 2012, the company expects total restaurant sales of $24.7 million. The guidance reflects approximately 1% same-store sales increase as the company will lap 9.1% comps from last year. Net income per share is expected to be 14 cents per share.

Our Take

We remain impressed with the company’s profit momentum and continuous market share gain in a highly competitive bar and grill segment. The company is also in an expansion mode with two openings anticipated for 2012 and more for 2013. The company is also assessing opportunities untapped in new and existing markets.

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

On the expense control front, management will likely show its expertise ahead. Although the food cost environment has heated up, management remains optimistic on seafood purchasing which will help the company withstand food cost inflation.

However, a modest year-over-year increase in beef costs is expected in 2012. Additionally, Kona is unlikely to enjoy the favorable impact of weather in the coming quarter unlike the first quarter.

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

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