Kona Grill's (KONA) CEO Berke Bakay on Q2 2016 Results - Earnings Call Transcript

| About: Kona Grill, (KONA)

Kona Grill, Inc. (NASDAQ:KONA)

Q2 2016 Earnings Conference Call

July 27, 2016 04:30 PM ET

Executive

Berke Bakay - President and CEO

Christi Hing - CFO

Analyst

Chris O'Cull - KeyBanc Capital Markets

Mike Tamis - Oppenheimer & Company

Tony Brenner - ROTH Capital Partners

Brian Vaccaro - Raymond James

Nick Setyan - Wedbush Securities

Mark Smith - Feltl & Company

Chris Krueger - Lake Street Capital Markets

Barry Kitt - Pinnacle Fund

Richard Deutsch - Ladenburg Thalmann

Operator

Good afternoon and thank you for joining us today to discuss Kona Grill's Results for the Second Quarter Ended June 30, 2016. With us are Berke Bakay, Kona Grill's President and Chief Executive Officer, and Christi Hing, Chief Financial Officer. Following their remarks, we'll open up the call for your questions. [Operator Instructions]

Before I begin, I would like to remind everyone that the financial guidance provided by the company, including statements regarding the future growth, sales and profitability are forward-looking. All forward-looking statements made during this call are based on 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 risks 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

Thank you, Kevin. Good afternoon and thank you all for joining us. For the second quarter ended June 30, 2016 restaurant sales rose 19.5% to 43.3 million, driven by 23% growth in restaurant operating weeks and positive same store sales of 2.5%. Given the soft consumer environment, we are pleased to have generated our 13th consecutive quarter of positive same store sales and expand our track record of comp sales gains to 23 to the last 24 quarters. We are also are in the sixth consecutive year of same store sales growth, which reflects the enduring and broad appeal of our concept across multiple markets.

By way of comparison, the Knapp-Track Index reported a 120 basis point decline in same-store sales for the second quarter, resulting in an outperformance of 370 basis points. Comparable restaurant sales growth was robust despite record wave pulling the state of Texas during May, which affected some of our highest volume restaurants and impacted approximately 30% of our comp base. We estimate that the rainy weather in Texas and Louisiana, along with the continuing impact of oil affected regions negatively impacted our comps by 400 basis points.

Now moving in to our operating results, the strong comps and favorable commodities environment combined with good P&L management during our seasonally strongest quarter, resulted in forward margins for the comparable base to 20.7%. This represents a 110 basis points improvement over the last year or a 50 basis points improvement if adjusting last years’ results to cost incurred during the Denver remodel closure.

The ability to drive 20% plus profitability is particularly impressive, given the labor challenges that the industry is experiencing with wage inflation and rising minimum wages.

As mentioned during our first quarter call, we had three new restaurants that are significantly affecting non-comp margins and overall company profitability. These three restaurants are located in successful malls, but have started off slower than anticipated due in part to nearby construction, which has limited visibility and access to our restaurant.

However, we believe that sales will ramp up as we build brand awareness and as nearby constructions complete and accessibility to our restaurant is improved. In fact, we are encouraged sales improvements at the two of the three restaurants and margin improvements at all three restaurants during the second quarter, as compared to the first quarter.

Average weekly sales for the non-comp base were 75,600. Excluding the three restaurants noted above, average weekly sales for the non-comp base were 83,600 or 90% of AWS of our comp based units, which is consistent with our expectation.

Overall margins for our non-comp based restaurants were 5.3% for the quarter, an improvement of 330 basis points from Q1. Excluding the three underperforming restaurants, non-comb based margins would have been approximately 13%. So as you can see with our small base of restaurants, a few restaurants are significantly impacting the year-over-year margin comparisons for 2016.

Second quarter margins for the non-comparable restaurant base were also affected by the newness of our restaurants as we opened three restaurants during the second quarter, including two in June. The average age of our non-comparable based restaurants during Q2 was approximately nine months, with seven of the 13 non-comparable restaurants opened with in the last nine months.

To remind everyone, we expect our new restaurants to lose money in their first one-to-three months of operation due to labor and cost inefficiencies, breakeven in months four and six and then gradually increase profits to be in the 7% to 10% cash flow range at month 12.

Now turning to development, we continue to execute upon our 2016 development plans of eight new restaurants which as I just referenced included three openings during the quarter, specifically we opened our first restaurant in California at Irvine at Spectrum Center on April 12, our second restaurant in Minneapolis market at Ridgedale Mall in Minnetonka on June 13, and our third restaurant in the DC market in Fairfax, Virginia at the Fair Oaks Mall on June 28.

We plan to two restaurants in the third quarter with the next opening scheduled for August 8 at the CoolSprings Galleria in Nashville, Tennessee. After this we plan to open in Hawaii as part of the brand new international market place anchored by Saks Fifth Avenue in Waikiki.

Finally we’ll round up the year with three openings in the fourth quarter in Huntsville, Alabama, North Star Mall in San Antonio, Texas and Winter Park, Florida outside of Orlando.

On the international front, we are very excited to have great partners to grow the Kona Grill brand outside of the United States, and are working diligently with them to evaluate potential real estate sites in UAE and Mexico. These agreements call for the development of six restaurants over the next seven years, and we expect both our partners to open first Kona Grill in their country during the first half of 2017.

Now turning to our future growth plans; we engaged Tango Analytics, a third party consulting firm to perform a site survey for Kona Grill’s brand potential in the United States based upon demographics, target market and other relevant information. Internally, we have been targeting 150 to 200 restaurants domestically and the Tango studied certain available data (inaudible) by having identified nearly 300 potential restaurants locations across the United States.

Without the ability to utilize multiple types of real estate to build our restaurant, our growth in not constrained by the number of malls across the country or the growing impact of online shopping and its impact on the mall traffic. We perform very well in lifestyle centers which account for over one certified current locations, but also in freestanding locations where we have great visibility and parking.

In view of these factors, our decision to moderate growth from approximately 20% in past three years beginning in 2017 is not due to the lack of real estate as there is ample wide space available to us. As of today, we have signed leases for two sites for 2017 and one site for 2018, a total of three lease commitments.

Initial plans are to open three to four restaurants in 2017 and provide flexibility with capital allocation decisions based upon market conditions. In any event, slowing growth from current levels will alleviate some of the pressure it has had on our financials over the last few years, and which have massed the earnings power of our company.

For example, each new restaurant opening comes with approximately $500,000 in pre-opening cost and $400,000 in the first year depreciation expense. So if one were to assume that each restaurant open in the middle of the year and breakeven during the first six months operations, each new restaurant is approximately $700,000 or $0.07 a share impact on earnings.

If we were to build four restaurants in 2017 compared to the nine restaurants, the savings on the P&L will be approximately $3.5 million from less pre-opening and depreciation or about $0.33 a share. These savings along with the reduced drag of high unit growth on restaurant level margins would ideally allow us to be EPS positive in 2017.

With that I’d now like to turn the call over to Christi, who will take us through the financials for the second quarter. Christi?

Christi Hing

Thanks Berke. For the second quarter restaurants bill increased 19.5% to 43.3 million, compared to 36.2 million last year. This increase was primarily driven by seven restaurants that opened since October 2015 and same store sales growth of 2.5%. Cost of sales continued to be favorable during the quarter, as the percentage of restaurant sales, cost of sales decreased 80 basis points to 25.9% compared to 26.7% last year.

The lower cost reflects favorable commodity pricing on chicken and certain produce and dairy items compared to last year, but higher salmon pricing. In addition to benefitting from a more benign commodity environment, we continue to leverage our increased purchasing power for key items.

Labor cost as a percentage of sales increased 160 basis points to 35.8% during the quarter, compared to 34.2% last year. The increase was primarily due to hourly labor cost associated with retail restaurant openings, wage inflation in many markets and the deleveraging of fixed labor cost at under-performing units.

Labor for our comparable based restaurant was essentially flat, which when combined the cost savings, same store sales growth and seasonally strong sales, allowed us to generate 20.7% overall margin. As a reminder, we schedule each new restaurant opening with higher staffing levels and gradually reduce these staffing levels as our teams become more efficient in operating the restaurant and understanding its particular trends and menu mix.

We have made adjustments for in our labor template for 2016 opening and are seeing some efficiencies generate through these new templates. However, it should be noted that two of the three restaurants we opened during the quarter are indeed at a higher than the federal minimum wage and more importantly have no tip credit. So the labor savings were somewhat matched by the higher per hour wage count.

Operating weeks from our non-comp based restaurants comprised 29.2% of total operating week during the quarter, compared to 27.9% last year. Occupancy expenses as a percentage of restaurant sales increased 60 basis points, reflecting higher rent cost for certain locations, increased common area and maintenance charges and higher real estate [capital]. Restaurant operating expenses as a percentage of sales increased 30 basis points to 14% compared to 13.7% last year, reflecting higher repair and maintenance cost, training and travel cost for new managers and personal property taxes.

Our overall restaurant operating margins were 16.8% during the second quarter, compared to 18.4% last year, reflecting a larger proportion of non-comp based restaurants in this year’s number, including seven restaurants that opened since October 2015. These seven restaurants had an average age of less than five months as of June 30.

Overall margins excluding the three underperforming restaurants were 19%. On an absolute dollar basis, restaurant operating profit decreased by 9.1% to 7.3 million, and would have increased 18.1% excluding the three restaurants mentioned above.

In the second quarter, G&A expenses were 3.3 million, as a percentage of sales G&A decreased by 100 basis points to 7.7% as compared to 8.7% last year. We continue to expect about a 100 basis points of leverage on G&A during 2016.

Preopening costs were 1.3 million during the quarter, including 365,000 of non-cash rent. The second quarter spend primarily reflects the cost incurred for the three restaurants opened during the quarter, two restaurants scheduled to open during the third quarter and non-cash pre-opening rent. Net loss for the quarter was 835,000 or $0.08 per share. We would have been profitable excluding the three underperforming restaurants.

Income tax expense was 25,000 for the quarter, which represents paid taxes. We have 29 million in federal net operating losses that we can use to offset future taxable income and therefore we don’t expect them for any federal income taxes for at least the next few years. We have 21 million in deferred tax assets and continue to maintain a full value [raging] allowance.

Adjusted EBITDA increased 9.7% in the second quarter of 2016 to 4.3 million compared to 3.9 million in the same quarter last year. Excluding the three underperforming restaurants, adjusted EBITDA would have increased by approximately 25%.

During the quarter, we purchased 734,000 shares for a total cost of 8.8 million under our November 2015 stock repurchase plan. We completed the 10 million buyback plan during the quarter, with a total of 833,000 shares purchased at an average cost of $11.99 per share. The share repurchases were funded by borrowings under our credit facility.

We had 18 million in debt outstanding at June 30, 2016, an increase of 13 million during the quarter. 9 million is attributable to the stock repurchase program and the remainder was for capital expenditure. Through the first half of 2016, we had CapEx spending net of [PI] of 18.6 million.

For the year, we continue to expect CapEx net of tenant allowances of 33 million to 35 million, consisting of 18 restaurant opening, initial spend for 2017 opening and three remodels as well as maintenance CapEx.

Given the soft consumer environment and lower than expected sales for our three underperforming restaurants, we are revising our 2016 guidance to reflect our current outlook. We are lowering 2016 sales guidance to a 176 million, representing 23% year-over-year growth from 179 million previously and revising our adjusted EBITDA forecast of 14.7 million, representing 22.5% year-over-year growth from 15 million previously.

We reiterate same store sales growth of 2.5%, which was revised upward by 50 basis points on our last call. We have seen a general choppiness in our restaurants, which we believe is due in part to civil unrest in markets such as Baton Rouge and Dallas, along with weak consumer sentiments. July trends have improved over the past few weeks, and we are currently flat for the month.

I will now turn the call back to Berke for some additional remarks, before we go to Q&A. Berke?

Berke Bakay

Thanks Christi. Our Board and management team are in agreement that the actions we have taken in the past and the decisions we are making today regarding our future are being done for the long term best interest of our shareholders. Moderating our development plans in 2017 to three to four restaurants is prudent in today’s sole consumer environment and provides us with the flexibility to allocate capital based upon market conditions.

With six consecutive years of same store sales growth, 20% plus comparable based margins during the quarter, and a long term roadmap for future growth, we are highly confident that Kona Grill’s best days lie ahead.

Thank you for your trust in our team and we look forward to updating you on our progress on future calls.

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

Question-and-Answer Session

Operator

[Operator Instructions] we’ll take our first quarter from Chris O'Cull with KeyBanc. Go ahead please.

Chris O'Cull

Berke I’m glad to hear will be slowing development in ’17 to increase the earnings power and focus on building sales and margin at the stores. I was hoping you could elaborate on how you plan to build profit at these newer stores.

Berke Bakay

Sure. Well first of all, the math that I ran through in our prepared remarks was simply illustrating the incremental earnings that you would get simply by growing opening less units next year by obviously having less depreciation expense and less pre-opening expense. So that in itself is a significant delta which where we are today versus how we can get to profitability.

And obviously if you look at the waterfall impact of all of the restaurants that we have opened that are currently not in the comp base and how their margin progresses throughout the year. Our model is really done by restaurant by restaurant basis and what I want to clarify is that getting to profitability next year does not assume a big turnaround on the three units that we are talking about.

Chris O'Cull

I appreciate the improvement to the consolidated result it will create. But just specifically though on some of these stores; I think you mentioned that it allows you to focus on building profit at the newer restaurants. What are some of the things you’d like to do or like your team to focus on in terms of just continuing to build that margin and profitability at some of these recent openings?

Berke Bakay

Right. And again we briefly alluded to that on our prepared remarks too. Obviously we’ve been changing our labor templates, especially at the initial first one, three, six months of the operations and we have seen some positive improvements to that. So the continued focus on labor will be very important. COGS efficiencies and trying to get there sooner with some of our learning going from 23 units in October 2013 to 45 units at the end of the year will be important.

And our general focus on marketing and brand awareness and getting our name out there on the local restaurant level and improving our awareness on the new restaurants and focusing on them and driving sales and the follow-through impact of that will be some of the main areas of focus.

Chris O'Cull

It sounds like those three restaurants where you do have under performance, it sounds like a lot of it is construction and some things outside of the control of the restaurant. But have you looked to see the operation - I’m sure you’ve looked at the operations to make sure they’re sound. Are there any things that you can do differently at those three restaurants to really reignite sales?

Berke Bakay

Chris I wish the answer was, obviously we have looked at it, it’s almost 80-20% rules. Feels like to be spending 80% of our time with those units, and we have tried a dozen different initiatives and market specific initiatives and we have some of the strongest management teams in our company running these restaurants and obviously we haven’t specified which one there, but I assure you that if you look at social media feedback and any other indicator that would talk to the quality of operations, not only there no red flags, they are some of our better operating performance coming out of those units.

And as we said in our prepared remarks, we were able to see margin improvements in all three of them and sales improvements in two out of those three. So if you recall on my prepared remarks on the last call, I predicted about a six month type of a timeframe for some of these negative impacts to go away and we are happy through that timeline and my prediction continues to be the same. So I’m hoping that three months later, we may start to see the true performance of those units and really understand what we can do in these restaurants.

Operator

We go next to Brian Bittner with Oppenheimer & Company. Go ahead please.

Mike Tamis

This is Mike Tamis on for Brian. Just a question about the decision to slow growth in 2017. You gave some good color on the impact financially, but why now, what was the main driver of that decision and I’ve a follow-up.

Berke Bakay

Sure, well I think we signaled that on the last quarter. If you look at my calls and comments, I think I described as a - just continue to grow restaurants at a pace of 200% and being valued at what I consider below replacement value that time of the year is not a rewarding strategy for our shareholders in our opinion.

You saw us fairly aggressive during the quarter and buying back our own stock. We shared what those numbers were and we believe that we simply are not getting rewarded for growing fast and especially given that we’re a small company its negative impact on pre-opening expense and depreciation and what it has on our earnings is really impacting our valuation.

And the fact that we’re here doing our job to [carry] shareholder wealth and value. So to the extent that that strategy is not resonating, I think you need to look that and try to see if there’s something different that you should be doing, that’s the best way I can answer it.

Mike Tamis

Sure that makes sense, and then can you just talk about maybe that how that impacts CapEx in 2017, how we should be thinking about that number?

Berke Bakay

That’s a great question. So in 2017, even if we do the high end of our openings at four units, we should be - I’m not going to give a specific CapEx number, but that combined with the maintenance CapEx and even remodels our cash flow that are generated from operations would be more that what we’ll be spending out. So I’m not going to give you a specific number on 2017 CapEx, but you should look at, even we do the four units which is the high end of our range, and you add the maintenance CapEx on top of that, the cash flow that is generated from our operations will be higher than that number.

Operator

We go next to Tony Brenner with ROTH Capital Partners. Go ahead please.

Tony Brenner

I think you implied that the lower guidance is a result of performance of the three affected new restaurants, is that right?

Berke Bakay

Part of it combined with some operating week losses on units that have not opened yet. That’s why our comp guidance continues to be the same, but the sales guidance is lower and the two drivers of that is not seeing enough of the turnaround on the restaurant sales on the three underperforming units combined with the operating week losses.

Tony Brenner

Although you did mention that sequentially they performed better.

Berke Bakay

Yes, two out of the three improved on sales and all three improved on margins sequentially.

Tony Brenner

But that’s still below your plan I gather?

Berke Bakay

Absolutely yes.

Tony Brenner

Since I understand that, that one of those restaurants under construction adjacent to Krona Grill is no longer under construction and is about to open, is that correct and are you seeing improved sales performance in that unit?

Berke Bakay

Yes, so maybe I’ll take this a kind of a gel commentary on all three of them. So what we have seen in one or two occasions, a major retailer that was under construction has opened and really helped both the traffic trends and our forward margin trends when that is completed. So right now we are in the - average business is normal there and we’re seeing the improvements on both sales and margins.

In other situation, we expect the construction related issues to be resolved by the end of this quarter that we are in. Even though we were able to see the restaurant both sales and margins to improve and the other restaurants the third one that we have seen the margins improve but the sales kind of going on the other direction.

This is the one that has an access issue to parking and both access and construction issues continue and we have a little bit better handle on understanding when the construction will be over, which is probably end of the quarter that we are in.

But the access to the parking land lord is within the permits to the city or they are still working on that with no given timeline. So we don’t have visibility on what the parking situation, when the parking situation was mitigated, but the construction situation we have enormous timing.

Tony Brenner

But those permits have not been denied, which is taking long.

Berke Bakay

I think it involves a parking study that needs to be submitted and they are in the middle of that and we don’t have granular information on the exact timing on when everything will be done.

Tony Brenner

Got it. What is effect of price increase on your new menu?

Berke Bakay

Right now we’re running with two, and we’re going to lose a point in the fall and we expect to put kind of replace it exactly that and so be affectively round with 2% of pricing for the rest of the year.

Tony Brenner

Okay. And last question, you’re slowing your new store build out so your CapEx will be significantly lower your share buyback is complete. Assuming the stock remains at current levels is it likely the Board would authorize further share repurchase.

Berke Bakay

I always follow your logic, we’ve been very transparent where we purchase the shares and how many of it we purchase during the quarter and everybody knows where the stock is. I’m really not going to speak for the Board and what the future actions may be, but I’ll leave it to you that studied our past and know how we look at the world to really speculate on that without backing myself in to a corner.

Operator

Next to Brian Vaccaro with Raymond James. Go ahead please.

Brian Vaccaro

Just a couple from me, on the plan to slow growth in ’17 appreciate the little bit of color on the CapEx outlook. But could you also speak to the impact or the potential impact on the growth in G&A specifically as we think about ’17?

Christi Hing

Yeah, I think for G&A, I think for 2016 we had a little over half of our revenue growth. So I would expect that to again be even lower than that. Again without giving specific numbers, but the primary headcount is intact and so it would just be an incremental here or there, but no significant increases in G&A from ’16 and ’17.

Berke Bakay

I would agree with Christi’s color and I would add that we really did the positions that you will add are handful and absolute dollar increase should be fairly reasonable. So you should see great leverage on the G&A line, especially given the fact that our overall sales increase for years should be still fairly strong given how many restaurants that were only opened partially this year and they will be opened fully next year. So if you run your models you will see a significant leverage on the G&A line.

Brian Vaccaro

Shifting gears to comps, Christi can you give the breakdown in the second quarter, breakdown between traffic and price versus mix that was affective in the second quarter please?

Christi Hing

So as Berke mentioned we had about 2% of price during the quarter, once again we had a favorable mix shift of about a 180 basis point and then we did see lower traffic about 130 basis points. We attribute a lot of that to the Texas reigns. As Berke mentioned our comps would have been higher by about 400 basis points if you took out Texas from Louisiana.

Brian Vaccaro

Understood. And then last one, just on the quarter to-date comps I think you said that you’re running flat and you mentioned this will rest on impact. Given the small comp base and the outside impact a handful of units can have, can you share what the quarter-to-date comps were excluding those two units.

Berke Bakay

I don’t think we have that number readily available Brian, but especially maybe a little bit more color that I can add is Baton Rouge and Dallas market both of them in the month of July; you had seen the traffic declines. But I don’t know if you recall this, we broke out last quarter and we talked about how strong our lunch and happy hour and dinner was and the same trends were there on the second quarter and what leaves us with is a weaker late night. And in some markets we heard commentary from our general managers that they see decline in late night traffic, less foot traffic in some of the cities that we have mentioned. So, certainly the impact is coming from mostly late night.

Operator

We’ll go next to Nick Setyan with Wedbush Securities. Go ahead please.

Nick Setyan

If you guys needed to close any stores, is there anything I would preclude that from happening like you did back when you guys wanted to close the three stores, I think it was in 2012 if I’m not mistaken.

Christi Hing

Yes, would there be that precludes us from closing those restaurants?

Nick Setyan

Yeah, is there anything in the contracts or kind of a lot leases, is there anything in the leases that would preclude you from closing stores if you wanted to?

Berke Bakay

Well I guess theoretically every time you sign a lease you’re making a long term contract to be there for the period of that. Having said that those are old negotiations with the land lords and understanding of the circumstances and coming to a mutual agreement. Obviously you can’t just walk out with no consequences, but having said that restaurants do close restaurants - restaurant companies close units from time to time. So physically speaking that’s absolutely no, but we don’t have plans to close anyone of those three units at this point in time.

As I mentioned, there’s a quite a bit of construction related improvement and changes that are coming up in a quarter and beyond. So we are optimistic that we are going to see improvements related to those and its very premature to have that discussion at this point.

Nick Setyan

Okay, so I’m looking at a high of when you guys generated over 14 million almost 15 million in operating cash flow and that was in 2014 and you guys had I think 26 or 27 stores in 2014. We are almost double that for 2017 and 2018. How do you view your ability to generate cash? Sure you guys can’t say, look its’ doubled and still works and maybe assume some kind of lower margin for the lower stores or the newer stores. I guess how do you internally look at your ability to vary cash flow.

Berke Bakay

Look I think the best statistics is what Christi shared. So 37 out of the 40 units that we had generated 19% (inaudible) margins during the quarter. I mean that should give you a general understanding on what’s going on with 90% of our restaurant base and what kind of cash flow that its’ generating.

Nick Setyan

And I understand the P&L with more near term, obviously we had a nice sequential take down in the cost of sales, how should we think about the cost of sales in Q3 and going in to through Q4?

Christi Hing

We expect the favorable cost to continue. Our lapping maybe a little bit more difficult comparison as we go in to the back half of the year. But as of now there’s nothing on our radar that concerns us in terms of rising prices. We still expect commodities deflation probably in the 2%; it’s not even a little bit more given what we experienced in Q2.

Nick Setyan

Just a last question towards the opening in 2017, are they going to be even throughout the year backend loaded frontend loaded?

Berke Bakay

Yeah, so the first two will be the spring time and depending on it we’d do the third or the fourth, either way that will be the fourth quarter.

Operator

We go next to Mark Smith with Feltl & Company. Go ahead please.

Mark Smith

Just looking at the slower growth, Berke can you just talk about your ability to fund these three or four restaurants in 2017 with the cash flow and that or having to take the [hostility] higher, anything that’s needed to do to bond this growth?

Berke Bakay

Sure. If you look at 2017 and look at - even if we picked four locations to open and how much that will cost us, and if you look at the general commentary that we have given you today on being EPS positive and back in to what kind of restaurant level cash flow that would have to generate. You would see that we generate more cash flow to then we need to open those four unit including the remodel plans that we have. So I feel very good about our ability to be able to do that.

Mark Smith

And then looking at non-comp restaurant if we exclude the three with construction issues is there anything else going on with your restaurants that makes you nervous about growth or any other issues that you see out there at the other non-comp restaurants?

Berke Bakay

No, the other non-comp restaurants were 13% overall margin during the quarter with a very young average life. We are very pleased with how they’re performing and you need to also take in to consideration that our comp is growing and some of the restaurants that were non-comp based are getting in to the comp base. And look at the comp base improvements that we have seen in Q1 and Q2.

So in general the restaurant that we have opened that are in the non-comp base today are outside of those three locations and performing above our expectations at 13%. And the one that are getting in to our comp base obviously have helped our margins to kind of put us in the top of the industry with four-wall margins been over 20%. So I’m very pleased.

Again, if you look at the 40 locations that we have today, I’m very pleased with what’s going on in 37 of them and the numbers speak for themselves for that. Otherwise you wouldn’t be able to generate 19% cash flow.

Mark Smith

And then just looking at comps being flattish now, what gives you the confidence that you can still hit this 2.5 number just looking at some holiday shift in Q4 that maybe will hurt looking at kind of Saturdays that might negatively impact it.

Christi Hing

Mark I think there’s a couple of things that we think are going to happen. For one we have some easier comparison from those oil related market, the Houston, the Fort Worth, the Woodland, this will be our second year of lapping that. So that should provide less of a drag on same store sales. We also have the [vocal] part three malls that we talked about on our last call and then we potentially may have a remodel or two coming up this fall.

Operator

We’ll go next to Chris Krueger with Lake Street Capital Markets. Go ahead please.

Chris Krueger

Right at the beginning of the call you indicated about rainy weather, unrest in Texas and Louisiana and the oil region. That they hurt comps by 400 basis points. How many units since then are you backing out roughly?

Christi Hing

I believe that eight units. So I believe we have seven excess restaurants in the comp base and an entire restaurants in Baton Rouge.

Chris Krueger

Okay, so excluding those you would account 6.5% in the remaining base?

Christi Hing

Yes.

Chris Krueger

And then just to clarify the 300 performing units were they all fourth quarter 2015 openings.

Berke Bakay

I don’t think we’re going to get in to that. Then it will be --.

Chris Krueger

How about the recent new ones that opened in the second quarter, any early feedback on those?

Berke Bakay

While one of them is in your backyard if you’ve been there, I think they are safe. We are pleased with their performance.

Operator

[Operator Instructions] we go next to Barry Kitt with Pinnacle Fund. Go ahead please.

Barry Kitt

You kind of talked around it, but should I assume that taking your CapEx plans in to account when measured against your current cash flow and borrowing capacity that you do not see a need to raise any capital?

Berke Bakay

Absolutely 100% no. I mean again I actually get frustrated that this question keeps coming up and up. We have not track record for diluting our shareholders especially when you’re talking about concepts like replacement value. I’m the largest shareholder of the company, last thing I would like to do is dilute myself while we’re buying back stock.

If you look at how much we bought, I believe it was around 7% of the company in one quarter. So doing that and on the other hand going and raising equity, I don’t know who would do that. You need to really be missing financial concepts and also - I don’t know how to answer that question.

Barry Kitt

Yeah, I can answer the question there from people who are looking at this, when I pointed out them. So I just felt good to say that. Next thing is can you give us some kind of idea how to look at the international opportunity, you mentioned the Middle East, the Mexico. You mentioned that you are putting our first two stores next year. There are other places around the world you are negotiating contracts, do you think they are closed, do you think you’ll have another one this year, do you think its next year, and what impact if you could generalize might opening those two stores next year have on your cash flow or P&L or which ever

Berke Bakay

Sure. As a reminder our two signed deals stipulate opening six locations on each of those markets in seven years. Both of our franchise partners have in one case multiple, in one case one deal that we have been out and approved. So they are slated to open in the first half 2017. So we expect two locations one from each franchise partner to open in the first half of 2017.

So we have not disclosed what the royalty rates that we are collecting, but if you look at what the industry standards are and obviously there are competitors in Dubai especially have higher sales volume and they are system averages from what we understand. So you can [bounce] on back of them with those numbers. But it will be a very high margin, obviously the revenue stream that we will be getting. And I’m actually going to go with our VP of International next week to meet with a couple of other franchise groups and other markets that we haven’t disclosed yet,

There are basically two markets that we’re working on and I don’ t want to say their names too me its early stages, but we don’t have a deal on the table by any means right now, but it’s encouraging the amount of interest that we’re working on. So we’re working diligently to sign a few other countries and get other partners to build our brand around the world.

Operator

We’ll go next to Richard Deutsch with Ladenburg Thalmann. Go ahead.

Richard Deutsch

Thank you for taking my call. I’m a little new to the story and so one question, where is your number one particular restaurant (inaudible)?

Berke Bakay

No, we haven’t got in to that. We have given some information generally speaking on a few of our restaurants but I let Christi answer, but we haven’t really.

Christi Hing

Yeah, I think for competitive reasons we chose not to disclose that information, and I’ll leave it at that.

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. A webcast replay will also be available via the link provided in today’s press release, as it is available on 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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