Kona Grill's (KONA) CEO Berke Bakay on Q2 2014 Results - Earnings Call Transcript

Aug. 4.14 | About: Kona Grill, (KONA)

Kona Grill, Inc. (NASDAQ:KONA)

Q2 2014 Earnings Conference Call

August 4, 2014 4:30 PM ET

Executives

Berke Bakay – President and Chief Executive Officer

Christi Hing – Chief Financial Officer

Analysts

Chris T. O'Cull – KeyBanc Capital Markets, Inc.

Robert M. Derrington – Wunderlich Securities, Inc.

Mark E. Smith – Feltl & Co.

Chris Krueger – Lake Street Capital Markets LLC

Nick Setyan – Wedbush Securities, Inc.

Brian M. Vaccaro – Raymond James & Associates, Inc.

Justin T. Ruiss – Sidoti & Co., LLC

Operator

Good afternoon and thank you for joining us today to discuss Kona Grill’s Results for the Second Quarter Ended June 30, 2014. Joining us today are Berke Bakay, Kona Grill’s President and Chief Executive Officer; and Christi Hing, the company’s Chief Financial Officer. Following their remarks, we’ll open up the call for your questions. (Operator Instructions)

Before I begin, this call is being recorded. I would like to remind everyone that the financial guidance the company provides for its third quarter 2014 results, statements regarding the company’s future growth, sales, profits and expectations regarding the same-store sales are forward-looking. All forward-looking statements made during the call are based on the information available to the company as of today and the company assumes no obligation to update these statements to reflect events or circumstances after the date of this call.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in the statements. Investors are referred to the discussion of risk and uncertainties contained in the company’s filings with the Securities and Exchange Commission.

I would now like to turn the call over to Kona Grill’s President and CEO, Mr. Berke Bakay. Sir, please go ahead.

Berke Bakay

Thanks, Greg. Good afternoon and thank you all for joining us. For the second quarter ended June 30, 2014, we continue to demonstrate the strength of our brand with strong same-store sales growth of 3.2%. Our growth in same-store sales reflected 360 basis point improvement in guest traffic, as we continue to take market share, offset by 40 basis point reduction in average guest check.

In addition to reporting positive same-store sales in 15, also last 16 quarters, the second quarter represents our fifth consecutive quarter of same-store sales growth. As the industry continues to experience declining traffic trends, we are pleased with our ability to drive continued growth in guest traffic. We believe this growth can be attributed to our differentiated menu offerings, our talented employees and our appealing ambiance, which are at the core of what makes our concept so special.

We are particularly pleased that we lapped the 2.5% increase in Q2 of last year, as our brands continues to build post the momentum, the Q2 industry’s same-store sales down approximately 1% and traffic down approximately 2%. There continues to be a large gap between our performance and the rest of the industry. The comp sales gap is over 400 basis points and the traffic gap between Kona Grill and industry trend is now over 550 basis points. Overall, restaurant sales increased 15.9% during the quarter, reflecting solid contributions from a full quarter of sales for three new restaurants and eight days of sales from our El Paso restaurant that opened on June 23.

We are pleased with the average weekly sales generated by our non-comp based restaurants, which were 81,900 for the quarter, compared to our comp based units at 89,300. We forecast new restaurants to start at about 10% below our system wide average and gradually build sales over time. We are pleased with the sales volumes at both our comp and non-comp based, in light of the continuously challenging industry environment.

During the second quarter, we opened our newest restaurant in El Paso, Texas. The opening marks our seventh restaurant in the State of Texas, including our three most recent openings. The restaurant is located at The Fountains at Farah, a lifestyle center with great visibility off of the I-10 freeway.

I continue to be very proud of our team for designing such a beautiful restaurant. We have a great team running this restaurant, and I look forward to Kona Grill becoming a staple in this community. Our non-comp based restaurants as a group are performing well.

During the quarter, our non-comp based restaurants generated restaurant level operating margins of 13%, well ahead of our anticipated ramp up rate. This number compares approximately 7% during the first quarter of 2014 and demonstrates the improvement in operating efficiencies as our teams get accustomed to scheduling labor and ordering products for anticipated sales volumes at each of our new restaurants. We’ll continue to provide transparency by detailing the performance of both new and existing restaurants to help you assess the performance of our business.

With that said, we are pleased with the 20% restaurant level operating margins generated by our comp based units during the quarter. As you may recall, Q2 is historically our strongest quarter in terms of sales and operating margins, primarily due to the fact that we are able to fully utilize our patios.

This strong number includes the impact of our Denver restaurant, which as discussed on our last call is currently in the middle of construction zone due to a major mall remodel adjacent to our restaurant. Both visibility and parking have been hampered as the nearby building was demolished over the past two months, which included the closing of our patio for several days.

We estimate that our same-store sales were negatively impacted by approximately 70 basis points, while our overall comp-based operating margins would have been 20 to 40 basis points higher absent the construction.

Now I’d like to turn the call over to Christi, who will take us through the financials for the second quarter and provide guidance for the third quarter. Afterwards, I’ll provide an update on our outlook before wrapping up the call with Q&A. Christi?

Christi Hing

Thanks, Berke. For the second quarter ended June 30, 2014, restaurant sales increased 15.9% to $29.9 million compared to $25.8 million in the second quarter of 2013. Second quarter 2014 revenues reflected a 13% increase in the number of operating weeks and as Berke mentioned, a 3.2% increase in same-store sales.

We are pleased with our comps amidst the challenging backdrop, which included an estimated 70 basis impact from the construction surrounding our Denver restaurant and a negative 40 basis point impact as a result of the Easter shift into the second quarter this year. We generated positive comps in each of the 13 weeks during the quarter, which speaks volumes to the popularity and momentum of our brand.

Our new restaurants contributed $3.3 million sales for the second quarter. As discussed on previous calls, you will see more variability in our P&L as new restaurants open and experience operating inefficiencies in their first several months of operation, especially as it relates to managing labor and COGS. As has been our practice, we’ll provide sales and operating profit margins for both the comps and non-comp based to help investors gauge the health of our business.

It’s also important to point out that pre-opening expenses will have a significant impact on our reported net income in any given quarter. For this reason, we’ve included adjusted EBITDA as an additional metric in our press release to highlight the performance of our restaurants, excluding pre-opening and stock-based comp costs.

With that, I’ll go into some detail on our second quarter results. Cost of sales as a percentage of restaurant sales increased 50 basis points to 27.5% compared to 27% last year. For the comp-based, COGS increased 30 basis points due to the challenging commodity environment for items such as shrimp, beef, pork, and dairy. We expect commodity pressures to continue for the rest of the year as drought and other conditions hamper the supply chain. By continuing to focus on strategic contracts, purchasing initiatives, and kitchen efficiencies, we believe we can mitigate these inflationary pressures to some extent.

In addition, the diversity of our menu and our 30% liquor mix helps us mitigate the potential impact of higher prices of any single commodity materially affecting our overall cost of goods. Labor costs as a percentage of sales increased 50 basis points to 33.1% during the quarter, compared to 32.6% last year. The higher labor costs are attributed to the impact of our new restaurants as they fine-tune their labor schedules based up expected sales volumes. For the comp base, labor cost as a percentage of sales improved 20 basis points compared to Q2 of last year.

Occupancy expenses as a percentage of restaurant sales increased slightly by 10 basis points to 6.7% compared to 6.6% last year. Partially attributed to higher common area maintenance fee charged by our landlords and a lower benefit of tenant allowance amortization at certain restaurant locations, as lease options were exercised for certain lease provisions lapsed.

Restaurant operating expenses as a percentage of sales in the second quarter increased 30 basis points to 13.5% compared to 13.2% last year, primarily due to higher utility costs, small wares, and personal property taxes.

Our overall restaurant operating margins were 19.2% during the second quarter of 2014 compared to 20.6% last year. The decrease in restaurant operating margins is due to new-unit inefficiencies, the impact of remodel activities near our Denver restaurant, higher commodity costs, and an increase in occupancy costs attributed to the items we mentioned earlier. We estimate that four-wall margins for our comp-based units were 20%, well ahead of our targeted comp-based operating margins of 18% to 19%.

On an absolute dollar basis, restaurant operating profit increased by $430,000 or 8.1% with the four new restaurants realizing aggregate restaurant operating margins of approximately 13% during the quarter. I would like to remind you that the second quarter is typically our strongest sales quarter, but caution investors on using our Q2’s new restaurant margins to forecast future periods. Overall, we continue to be pleased with our four-wall margins. We estimate that it takes approximately six months for new restaurants to learn how to effectively forecast sales and obtain efficiencies with regards to scheduling employees, hiring trained staff, and ordering and prepping products.

As we mentioned earlier, our restaurant operating profit margin will experience some variability based upon the timing of new restaurant openings. In the second quarter of 2014, G&A expenses increased by $433,000 to $2.4 million compared to the same year ago quarter.

As discussed on previous calls, the increase was primarily attributed to planned human capital investments we have made over the past 12 months to 18 months to support our growth initiatives. Building a strong foundation is the key to our growth. We’ve recently added a new district manager position to help oversee our growth, and expanded our recruiting efforts to help us find great talent.

We are also working on tax planning strategies, which will significantly impact the amount of income taxes repay over the next few years. While the benefits of these initiatives will be reflected in our tax line, the fees associated with these initiatives will be reflected in G&A. So all in all, we expect to see about a 30 basis point to 40 basis point increase in adjusted G&A costs as a percentage of sales for 2014, compared to last year.

During the second quarter, we expect $580,000, or $0.06 per share on pre-opening expenses for our El Paso restaurant, which opened on June 23, as well as manager training costs and non-cash pre-term rent for our three restaurants scheduled to open during the fourth quarter of 2014. Since the quality of a restaurant management team has significantly determine how well our restaurants gets out of the gate and ultimately perform. We have made the strategic decision to higher great talent when we find it.

To that end, you may see us incur more pre-opening expenses with respect to manager training costs per restaurant, so that we can get restaurant managers involved in a new restaurant opening, which will provide them with some experience prior to opening their own restaurants. The average pre-open spend for our four new restaurants was within our forecast of approximately $0.5 million per restaurant, including non-cash pre-opening rent.

The second quarter 2014, we did not record any income tax expense based upon their projected benefits of certain tax planning strategies currently in progress. We will continue to assess our full-year income tax rate, pending the outcome of our tax planning initiatives. Net income for the second quarter was $1 million or $0.11 per diluted share, compared to $1.6 million or $0.18 per diluted share last year. Our second quarter earnings included approximately $0.09 per share in pre-opening expenses as well as other costs associated with operating new restaurants and the impact of the previously mentioned construction near our Denver restaurant.

On an apples-to-apples basis if you exclude the $0.09 per share and costs discussed above, diluted earnings per share would have been $0.20. For the quarter, adjusted EBITDA was $3.5 million, an increase of 2% over the prior year. We expect this metric to grow at a strong rate in 2015, as we leverage our G&A, and new restaurants ramp up to contribute more meaningful to this line.

At June 30, 2014, we had $42.2 million in cash and investments, compared to $6.1 million at December 31, 2013. The increase reflects the proceeds of our recent equity offering, which was completed in late June. We also paid off our borrowings under the credit facility and had no debt outstanding at June 30, 2014. During the first half of 2014, we generated $8.1 million in cash flow from operating activities, compared to $4.1 million in the same period last year, which represents a 97% increase.

We spent $9.5 million on capital expenditures during the first half of the year, primarily for Fort Worth, El Paso and upcoming restaurants, compared to $1.3 million during the same period last year. The $9.5 million represents gross CapEx prior to any landlord allowances. With the strong first half of the year in the books, I’ll move on to our projections for Q3.

For our third quarter 2014 financial guidance, we are forecasting restaurant sales of $29.5 million, compared to $24.5 million in the third quarter of 2013. Our Q3 sales guidance incorporates an expected 17% increase in operating weeks, reflecting a full quarter sales for the four new restaurants. Our Q3 guidance also reflects positive same-store sales of approximately 2%. We continued to build positive momentum, and our guidance reflects more difficult comparisons as we lap three consecutive years of positive same-store sales growth. The comp guidance also contemplates anticipated sales headwinds from the landlord mall remodel project next to our Denver restaurant, which impacted Q2 comps by about 70 basis points, and will continue to impact comps for the next 12 to 18 months.

For our earnings guidance, we have three restaurants opening in the fourth quarter and therefore we will incur a large amount of pre-opening costs in Q3. We are forecasting Q3 net income of $2 million. or $0.2 million, or $0.02 per share, which includes approximately $0.08 to $0.10 per share in pre-opening and other costs associated with opening and operating new restaurants, as well as an estimate of lost profits with associated with the mall remodel adjacent to our Denver restaurant.

I will now turn the call back to Berke before we go to Q&A. Berke?

Berke Bakay

Thanks, Christi. With the recent equity raised and development pipeline that is into best position in the company’s history and increasing consumer demand for differentiated concept such as our, we are updating our guidance to 20% unit growth for the next several years. We are currently negotiating multiple deals to fill up our 2015 and 2016 real estate pipeline. These sites include some high-visibility locations in both new and existing markets.

Coming off of the ICAC Real Estate Commission in May, we are seeing some of the best properties in the country and are now on the shortlist, so to speak, when it comes to the developers list of highly desired tenants. We will continue to work diligently to solidify our pipeline, but the great quantity and quality of these sites we are seeing today give us the confidence to update our long-term unit growth guidance to 20% annually. We’ll provide an update on new leases signed on our next call.

On the development front, construction is underway at the three restaurants scheduled to open during the fourth quarter. We are very excited about the prospects of these new restaurants and look forward to expanding our brand in Sarasota, Florida, Alpharetta, Georgia and Columbus, Ohio.

By the end of the year, we expect to have 30 restaurants in 19 states, which speaks volumes to our ability to be a National Restaurant concept. We continue to be pleased with the success of our operational initiatives designed to enhance the guest experience, while building our business for the long-term.

During the quarter, we ran our second foot-based promotion of the year called Recharge, which included all favorites that can no longer be fine on the regular menu, but are loved by the fans across the country.

This promotion included items such as Lobster and Ahi Flatbread, and Diablo Shrimp trend. We recently rolled out our newest foot-based promotion called Tryst and I have seen strong sales to-date. These limited time offerings are a great vehicle for testing new menu items and are an integral part of our menu-development process. Our plan to build a premier polished, casual concept that is distinguished by award-winning sushi and New American cuisine with a significant bar business is well underway.

We have demonstrated the ability to drive strong unit-level economics, with $4.3 million average unit volumes, operating margin into 18% plus range and 30% return on invested capital.

We have great sales momentum with positive same store sales and 15 of the last 16 quarters, and considerable white space with only 27 restaurants in 17 states. The DNA of our concept is well intact with our multiple day part model, attractive restaurant design, high liquor sales and large sushi mix. Our new units are performing above expectations and our real estate pipeline is the strongest that it has ever been. With all of this, we are confident that we can build Kona Grill into billion dollar brand. We appreciate everyone’s support and we look forward to updating you again, on our next call.

With that, I would like to open the call for any questions you might have. Greg, please open the line for the questions.

Question-and-Answer Session

Operator

Absolutely. (Operator Instructions) And our first question today comes from Chris O'Cull with KeyBanc.

Chris T. O'Cull – KeyBanc Capital Markets, Inc.

Thanks. Good afternoon, guys.

Berke Bakay

Hi, Chris.

Christi Hing

Hi, Chris.

Chris T. O'Cull – KeyBanc Capital Markets, Inc.

Berke, can you give us an update on where the three remaining stores that you planned to open in the fourth quarter are in the process?

Berke Bakay

Sure. They’re well under construction. So a couple of those are within the existing mall openings. So, they are in the mid to late October. Those are the grand openings of the project. And then the final restaurant will be our Columbus, Ohio, which will be later in the fourth quarter.

Chris T. O'Cull – KeyBanc Capital Markets, Inc.

Okay, great. And then can you also update us on and I may have missed this, what’s the plan for remodeling the Vegas restaurant this year?

Berke Bakay

Sure, well. We have previously discussed the potential of remodeling Las Vegas during this year and given the success of our rooftop patio and Fort Worth, and the Las Vegas location opportunity to have a rooftop, we have changed our plans to include a rooftop with our new remodel and therefore pushing that remodel towards next year. So that requires a further preparation from a design and also permit perspective, so that has pushed the timelines on that remodel.

Chris T. O'Cull – KeyBanc Capital Markets, Inc.

Okay, great. I’ll let someone else ask.

Berke Bakay

Sure.

Operator

And our next question comes from Robert Derrington with Wunderlich Securities.

Robert M. Derrington – Wunderlich Securities, Inc.

Yes, thank you. Berke, could you give us a little bit of color on the check average the fact that it was down in the quarter, was that by design strategically or was it based on some higher influence of lunch business?

Berke Bakay

Bob, as you know we always tweak our business, so I would say it is definitely by design. We have changed availability of our happy hour on Sundays in our restaurants, so the happy hour has taken a little bit of a larger mix, but if you look at the apples-to-apples situation for lunch or dinner in existing restaurants, we do not see any pressure or downgrade on the average checks so to speak. So it’s just our opportunistic ability to play around with our happy hour availability on Sundays.

Robert M. Derrington – Wunderlich Securities, Inc.

That’s helpful. And then, as we go forward, any kind of thought about further menu evolution and how that affects the check average, should we expect more focus on entrees or because of the pressure in the business, in the industry, more value based promotions, how should we think about that?

Berke Bakay

No. I wouldn’t say value based promotions, again we believe that our brand offers – our offerings have the great value, but as you know we stay away from price, or promotions, so to speak and again, as a reminder, put this promotions are integral part of our business. So we continue to continuously evaluate future menu items throughout that foot based promotions, but we’re very happy with our average ticket and where it stays today. So, I wouldn’t necessarily think of it going one way or another so to speak. We are not trying to push that higher or lower.

Robert M. Derrington – Wunderlich Securities, Inc.

If I may one last one, Christi, could you help us a little bit with the inflation, expectation as we are going into the second half of the year, especially the third quarter into the fourth?

Christi Hing

I assume Bob, you are talking about commodities…

Robert M. Derrington – Wunderlich Securities, Inc.

Yes, yes.

Christi Hing

Yes, what we saw in the second quarter just on the cost base we had a solid 30 basis points increase in COGS primarily related to those commodity pressures. And for the most part we’ll expect to see that continue for the back half of the year. Possibly a little bit relief on shrimp, but as for as beef costs, we hadn’t really seeing a relief so far.

Robert M. Derrington – Wunderlich Securities, Inc.

Gotcha, very good. Thank you.

Operator

Next, we’ll move to Mark Smith with Feltl & Co.

Mark E. Smith – Feltl & Co.

Hey guys, just to dig in a little bit more on pricing, can you discuss any pricing that you’ve taken since quarter ended, kind of in next menu rollout and any other further thoughts and what kind of your strategy going forward on taking menu pricing?

Christi Hing

In the last time, we took price on our menu was early April when we had our spring menu update. and the next time, we hope that our menu will be in the fall and we’ll likely look at taking some price there, but no financial decision has been made.

Mark E. Smith – Feltl & Co.

And then if you can talk about alcohol mix at new restaurants and if you are seeing any difference?

Berke Bakay

On average Mark, we are not seeing any difference as an average number, because Fort Worth is a rooftop patio that the alcohol mix on that restaurant is a little bit higher. So, but again, not substantially higher, it’s just slightly higher. but overall, we are seeing numbers that are in line with our system averages at that 30% range on our new restaurants.

Mark E. Smith – Feltl & Co.

Great, thank you.

Berke Bakay

Thank you.

Operator

And next up we have Chris Krueger with Lake Street Capital Markets.

Chris Krueger – Lake Street Capital Markets LLC

Hi, good afternoon.

Berke Bakay

Good afternoon.

Christi Hing

Hey, Chris.

Chris Krueger – Lake Street Capital Markets LLC

Hi. it looks my questions were answered. but can you remind me – remind us on the Denver situation, when did that begin and then I think you said it’s going to last another 12 to 18 months?

Berke Bakay

Sure, Chris. that’s started in April and it intensified throughout the quarter. so it worsened so to speak in the months of May and June. and so basically, you have a big anchor getting there, their store being demolished and a new opportunity being created in the mall. ultimately, it’s going to create a better situation for us. Denver is our smallest restaurant in our chain from a per square footage perspective.

We would like to have a bigger restaurant is going to give us an ability. It has a small patio, we’re going to be able to have a bigger patio when everything is set and done. So the demolition so to speak is over, but then there is a construction phase that we’ll continue to be there for another year or 18 months or so. So again, we quantified in our prepared remarks, the impact that we have seen during the quarter and what we expect to see going forward.

Chris Krueger – Lake Street Capital Markets LLC

Okay. and on your pipeline for new openings and all everything is in place obviously for this year, how many – do you know how many leases have been signed for 2015 so far?

Berke Bakay

Sure. we have four leases signed for 2015. but again, as I mentioned on my prepared remarks, our deal activity – deal flow activity is very strong and you should appreciate the fact that some of these negotiations have been in place for over six months or so. So we feel very good about our ability to sign some great real estate in coming months and update you on our Q3 call like we did last year with some new leases signed, or next year in 2015 potentially.

Chris Krueger – Lake Street Capital Markets LLC

Okay. last question on the commodity pressure that everybody has been seeing in the last few quarters, is there any particular commodity that kind of stands orders as a kind of more or less across the board?

Berke Bakay

Everything. when you look at the beef shrimp dairy, our avocados, I mean you name it everything have seen pressure again, as a reminder half of our business being sushi and alcohol really mitigate the impact so to speak. but when you have all-time high prices on beef or shrimp going in the wrong direction. We are not completely named from that, it’s just an impact; the total impact of it is less than our concept than our competition.

Chris Krueger – Lake Street Capital Markets LLC

All right. That’s all I got. Thanks a lot.

Operator

Next from Wedbush Securities, we’ll hear from Nick Setyan.

Nick Setyan – Wedbush Securities, Inc.

Thanks. Hey Berke and Christi, hi. My question is on the flow margins. I thought, it was great to see the non-comp stores of 13% relative to my expectations. So we can talk about sort of where some of that improvement and inefficiencies that are effective is coming from, is that mostly labor as it kind of even between COGS and labor?

Christi Hing

Yes, Nick. I think as we mentioned Q2 is our seasonally strongest quarter. So just getting those sales does help, the other thing is piece is probably the labor piece. So as restaurants get used to whatever the typical AWS is in staffing for that level. That’s point of view the largest piece of that restaurant operating margin is improved bit and then costs would come secondly.

Nick Setyan – Wedbush Securities, Inc.

Got it. And then kind of thinking about Q3 on your guidance, what kind of unit level four-wheel margins did that imply on a consolidated level? Maybe you could talk about the non-comp versus the comp stores?

Christi Hing

We haven’t really provided guidance, Nick. this is our kind of our first time with new restaurants in over four years. So, we were definitely pleased with the 13.1% margins that we generated. We know for us, would football season start, we typically get a little bit of a slowdown in sales with back to school. So we get a little bit of deleverage. So without giving specific guidance, I wouldn’t expect us to go too far away from our previous guidance of restaurants getting up the speed after six months and then gradually building those restaurant operating margins over the next six months to 12 months.

Berke Bakay

Nick, to add to Christi’s point, as you would appreciate this management team with this design is these restaurants are the first ones that are coming out of the gate. so, so far they are ahead of our expectations, but we don’t want to take a short amount of data and start extrapolating for future. So we are pleased, but we continue to be kind of staying with our previous expectation zone what those numbers are.

Nick Setyan – Wedbush Securities, Inc.

Okay, okay. And then let me just ask one more question on pricing, just to clarify. Maybe you guys can remind us what the menu price within the quarter was. and then, I know somebody asked the question, let me ask you a little bit of a different way, would you be willing to take enough price to offset some of the inflation, or is that maybe asking too much?

Berke Bakay

Sure. Well, the menu pricing there we’re running with is right around 70 basis points to 72 basis points to be exact. Again, if you look at our composition of traffic growth and we talked about 15 out of 16 quarters of same-store sales generation, primarily driving by traffic. We are always extremely cognizant about protecting the value proposition of our brand. So to that degree, to compare us with other leading chains out there, you see us a little bit below the radar screen so to speak. So we’ll continue to protect that integrity, so you’re not going to see us at the top end of that range, but we’ll continue to adjust our pricing as needed.

Nick Setyan – Wedbush Securities, Inc.

Got it. And just one last question, on the CapEx side, are you guys seeing maybe a little more willingness from the developers to give you TI as they learn more about you and how should we think about remodeling next year, and maybe could you just remind us about this year and what your expectations on CapEx are?

Berke Bakay

So we are in a position of strength from a TI perspective. Again I don’t want any of us to extrapolate higher numbers so to speak than what we have done. Since our inception, but when you think about a national brand like ourselves that is going to be in that 19 states by the end of this year with only at that point, 30 restaurants. We have this unique ability to provide a concept that is very much so that there is highly differentiated; it’s a traffic generator for these centers. And if you look at our articulated growth rates, there is only so many that we’re opening, because of our small base. So we certainly are in a unique position where we can put multiple A sites next to each others so to speak and really choose from equally strong real estate opportunities that are willing to provide us better economical deals. So it’s a little bit of a long answer, but I’d – the short answer is yes.

Nick Setyan – Wedbush Securities, Inc.

Okay, thank you very much.

Berke Bakay

Sure.

Operator

And next we’ll go to Brian Vaccaro with Raymond James.

Brian M. Vaccaro – Raymond James & Associates, Inc.

Thank you, and good afternoon everyone. Couple of quick modeling questions, most of my question been answered, but on the pre-opening costs you mentioned some more investments and going after the best people and certainly make sense. But I wanted to a get sense if you are – If you could give us some help on the kind of the Q3 versus Q4, so it’s a lumpy number and it’s obviously a pretty meaningful one here. And if you could also in the G&A side one other one, you mentioned 30, I didn’t write it down quick enough, 30 to 40 basis points. Did you say deleverage versus an adjusted base and if you could remind us what that adjusted base would be from 2013 that would be great? Thank you.

Christi Hing

Brian, let me tackle your G&A question first. So for G&A I believe we are at about, adjusted G&A of about 7.7% or 7.8% last year. So about a 30 to 40 basis points deleverage sort of 81, 82 for the year and that really has to do was, it’s primarily people investment. We talked about a little bit on tax planning strategies and then also, we’ve mentioned on our previous call, SOX 404 so that definitely we’re right in the middle of that. So incurring some cost associated with making sure our internal controls are in place and operating effectively. In terms of pre-opening cost, as Berke mentioned, we’ll have a couple of restaurants opening in mid-to-late October, so we’ll incur a good portion of those pre-opening cost in Q3. And then we’ll obviously already have pre-open rent, non-cash, but we’ll incur a lot of that also in Q3. So to give you some guidance we’re probably looking around $600,000 or so for preopening cost for Q3.

Brian M. Vaccaro – Raymond James & Associates, Inc.

All right, that’s helpful. Thank you.

Operator

Next we’ll hear from Justin Ruiss with Sidoti.

Justin T. Ruiss – Sidoti & Co., LLC

Good afternoon, Berke and Christi. I just had a quick question, and most of mine had been answered as well, too. But I just had a quick question on where you're seeing most of the concentration in sales throughout the marketplace, and is there any geographically one specific sector that you're seeing most sales from?

Christi Hing

No, I think Justin, as we reported; we had all 13 weeks were strong, so because we’re so spread out, it’s hard to say there is a geographical favorable mix. So nothing really on the geography if anything with restaurants such as San Antonio, we mentioned that we were able to expand the patio by about 60 seats, so obviously we’re going to see some strong sales there, but nothing specifically on geography.

Justin T. Ruiss – Sidoti & Co., LLC

Got you. Is there any, I guess when you are looking at real estate going forward, is there any specific market that obviously, it looks like all three restaurants that will be opening in the next quarter, at least two of them will be in more warmer client, is it anything really popped out for you guys on that real estate endeavor?

Berke Bakay

Justin, if you look at our footprint all the way from Stamford, Connecticut to Las Vegas, and having restaurants 1,000 miles away from which other in individual state, we really have this wide space opportunity on real estate and we look at it as very much deal specific, and the merits of the center, and the quality of the site and the economical terms that are a part of that deal, not necessarily driven by other factors, that’s one side of it, always everything else being equal if we have an opportunity to go into markets like you see that in last three restaurants opening in the state of Texas like we have a great experience. and we made skew towards that, and again, that doesn’t mean we are only going to open restaurants in that state. And as you are going to see Ohio and Georgia are completely two new states for us that will take us from 17 to 19 by the end of this year.

Justin T. Ruiss – Sidoti & Co., LLC

Okay, thank you.

Berke Bakay

You are welcome.

Operator

At this time, this concludes our question-and-answer session. I would like to remind everyone that this call will be available for replay later this evening, and webcast replay will also be available via the link provided in today’s press release, as well as online in the company’s website at www.konagrill.com. Thank you, ladies and gentlemen for joining us today. You may now disconnect.

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Kona Grill (NASDAQ:KONA): Q2 EPS of $0.11 in-line. Revenue of $29.88M (+15.8% Y/Y) beats by $0.1M.