Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Kona Grill Inc. (NASDAQ:KONA)

Q2 2012 Earnings Call

July 27, 2012 05:00 pm ET

Executives

Berke Bakay - President & CEO

Christi Hing - CFO

Analysts

Mike Malouf - Craig Hallum

Mark Smith - Feltl & Company

Lee Giordano - Imperial Capital

David Kahn - Raymond James

Operator

Good afternoon and thank you for joining us to discuss Kona Grill’s results for the second quarter of 2012. Joining us today are Berke Bakay, Kona’s President and Chief Executive Officer; and Christi Hing, the company’s Chief Financial Officer.

Following their remarks we will open up the call for questions. (Operator Instructions) Before I begin, I would like to remind everyone that the financial guidance the company provides for its third quarter 2012 results, statements regarding the company’s future sales, profits, and expectations regarding same-store sales 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 to risk and uncertainties contained in the company’s filings with the Securities and Exchange Commission.

I would now like to turn the conference over to Kona Grill’s President and CEO, Berke Bakay. Please go ahead.

Berke Bakay

Thanks, Anna. Good afternoon and thank you all for joining us. We continued our strong momentum during the second quarter with same-store sales comps of 2.3%. Our positive comps during the quarter represent Kona Grill’s seventh consecutive quarter of positive same-store sales and the 10th consecutive quarter of positive traffic, which we believe demonstrates the strength and momentum of our brand in multiple markets. We were able to leverage the strong sales growth to drive top-tier unit level margins of 19.4% as well as $0.28 in EPS which is an all-time record for our company. As mentioned in our press release, excluding the impact of the Troy fire, our unit level margins were 20%, which we believe is one of the best in the polished casual segment.

It is also important to point out that our earnings for the first half of 2012 have already exceeded our full-year 2011 earnings by over 45%. We believe these strong earnings are a direct result of offsetting performance from each of our restaurants as a result of company-wide operational initiatives and discipline spanning.

For today’s call, Christi will walk us through the financials for the second quarter and provide guidance for the third quarter of 2012. Afterwards I'll provide and update on some of the initiatives we're working on and then wrap up the call with Q&A.

With that, I'll like to turn the call over to Christi. Christi?

Christi Hing

Thanks, Berke. For the second quarter ended June 30, 2012, restaurant sales increased 2% over the same-year ago period to $25 million, reflecting a 2.3% increase in comparable restaurant sales. The increase in comp sales represents a 250 basis point increase in guest traffic during the quarter or average check declined about 20 basis points due to some of our Happy Hour initiatives.

We're pleased with our Q2 comps given that we’re lapping 9.1% comps from last year. It is important to note that sales for the quarter were impacted by our fire at our Troy Michigan restaurant in early May. We estimate that approximately $200,000 in sales were lost during the quarter due to the closure of the restaurants for 3.5 days and the lost sales caused by the partial closure of the patio through the end of June.

All Troy sales numbers are excluded from our comp-based calculations for the effected period, there is no doubt that the fire impacted our reported results as Troy sales were up double-digits prior to the fire.

Despite the current economic headwinds, our comps continue to remain resilient as the second quarter represents our seventh consecutive quarter of positive same-store sales and on a trailing two-year basis, our Q2 comps are up over 11%.

For Q3, the comp comparison continues to remain difficult as we lapped 10.3% comps in Q3 of last year. To help combat the difficult comp comparisons, we are taking 1.1% in price on our new menu that rolls out tomorrow. It's important to note that the last time we've taken price was 14 months ago.

Cost of sales as a percentage of restaurant sales were flat at 27.3% for the second quarter. Produce pricing for the quarter was lower versus the same period last year or was offset by higher beer and wine cost associated with Happy Hour promotions and the half bottles of wine offered during our Wine Down Wednesday program in selected markets. Berke will provide additional color on these programs in his remarks. We continue to work diligently with our vendors to negotiate contracts that ensure the best possible pricing.

As discussed on our last call, for 2012, we are optimistic that improvements in seafood purchasing and other initiatives will help mitigate any material impact to food cost for the remainder of the year. A variety of menu items helps insulate us from commodity cost pressures that some of our competitors are facing. Over 54% of our sales are from the bar and sushi, which is a significant differentiation factor for most of our competitors. We continue to monitor drought conditions throughout the country and their potential impact on food cost going forward.

Labor expenses as a percentage of restaurant sales increased 20 basis points to 32.9%. Sequentially this number is flat, but we believe it shows that we’re staffing our restaurant for success. Restaurant operating expenses as a percentage of restaurant sales decreased 20 basis points to 14.3% during the second quarter. The lower operating expense percentage was primarily attributed to a 60 basis points reduction in marketing expenses, reduced credit card processing fees from the law that went in to effect last fall and the reduction in utility cost from lower negotiated rates.

These reductions were partially offset by increased train travel and relocation costs and costs related to the fire in Troy. Occupancy expenses as a percentage of restaurant sales decreased 90 basis points to 6.2% during the second quarter. As mentioned on our previous calls, the decrease reflects the amendment of the lease provisions for one restaurant in addition to leveraging the fixed portion of these costs from higher same-store sales.

Combining these four line items, restaurant operating profit increased 8% to $4.9 million for the second quarter of 2012. As a percentage of restaurant sales, restaurant operating profit improved a 100 basis points to 19.4% compared to 18.4% last year. We estimate the Troy fire impacted restaurant operating cash flow by approximately 60 basis points.

General and Administrative expenses decreased 29% or $628,000 from the prior year quarter primarily due to a benefit of $155,000 related to the modification of a separation agreement with a former executive and severance and related benefits incurred during the second quarter of 2011 for another executive. Also, lower legal and professional fees along with cost-containment initiatives helped reduced G&A to 6.1% as a percentage of sales.

If you exclude the one-time severance items noted above for both periods, G&A as a percentage of sales would have been 6.7% compared to 7.7% during the prior year. Based upon current period results, we now expect G&A to run in the mid 7% range for the full year 2012. We are proud of our G&A spend relative to our competition and will continue to be disciplined in this area.

Net income increased a 126% or 1 million for the quarter to a record $1.8 million or $0.20 per share compared to net income of $782,000 or $0.08 per share in the prior-year quarter. When looking at net income on a sequential basis, it has increased four consecutive quarters and grown almost 50% when compared to the first quarter of 2012. Our strong G&A leverage and poor low margins contributed to the higher than expected earnings. It is important to note that earnings of $0.20 per share is a clean number as the (inaudible) of a 155,000 is offset by cost for the insurance deductible and loss margin associated with the Troy fire.

We ended the quarter with $8.3 million in cash and investments compared to $6.3 million at the end of the year. During the quarter we purchased and retired 95,500 shares at average cost of $7.93 per share for a total cost of about $760,000 under our $5 million stock repurchase authorization which was initiated in May.

Total of debt was $400,000 at June 30th 2012 compared to $100,000 at December 31st 2011. Last week we amended our $5 million credit line with Stearns Bank National Association. The amendment allows us additional flexibility by increasing the line by $1.5 million to $6.5 million, while upto $2.5 million for our share repurchase program and reduces the interest rate forward by 130 basis point to 4.95% per year on borrowings for restaurant remodeling and new construction projects.

Our free cash flow remains strong as we generated 2.2 million in the second quarter after the stock buyback and capital expenditures. Moving onto our third quarter 2012 financial guidance. We are forecasting sales of $24.1 million, a net income of $1.1 million or $0.12 per share compared to net income of $600,000 or $0.06 per share in the third quarter of last year.

Our guidance reflects the expectation of a same-store sales increase of approximately 1% for the third quarter as we rollover the 10.3% comp from last year. Q2 is typically our strongest quarter in terms of sales and profits and Q3 will see a bit of a slowdown in sales as we enter the back to school season. I will now turn the call back to Berke before we go to Q&A.

Berke Bakay

Thanks Christi. During the quarter, we continued to execute on various initiatives designed to drive guests traffic and increase guests frequency. We've built on the success of our food based promotions by introducing our Trim menu promotion in May and our Flare menu two weeks ago, which features items with a touch of [heat].

These food based promotions continue to showcase new items, while allowing us to source a guest feedback that is invaluable in helping us, ensure our menu is relevant. The food based promotions provide our guests with additional reasons to come back more often and have been an integral part of success over the past 24 months.

Starting tomorrow, we will roll out our summer menu update including the additional food based promotion pay rates such as chicken caprese sandwich, soft shell crab po boy and banana cream pie while removing select lower volume items to keep our menu fresh and attractive to our guests.

As Christi mentioned, the new menu includes about 1.1% in pricing. At the end of June, we rolled out our new wine list in our effort that we believe significantly improves a selection of wines available at our restaurants while adjusting pricing to be more competitive. The new list includes the addition of 23 wines at that were blind tasted from a list of more than 250 labels.

Further, we supplemented our new wine list with additional training for our managers and staff to make talking about and selling wine an enjoyable process for both our staff and guests. As mentioned on our last call, in April we rolled out our Wine down Wednesday program in eight such restaurants.

This promotion consists of half of followers of wine throughout the restaurants every Wednesday. Guests feedback continues to be very favorable and we are seeing significant increases in the average number of bowls sold in these restaurants compared to last year which is in addition to moderate increases in the average check for guests participating in the promotion.

We continue to monitor the program and its impact on guests traffic and margins. We are also testing happy hour initiatives at various restaurants to drive traffic at increased frequency of loyal customers. As we mentioned on our last call, the philosophy behind the happy hour initiatives is to ensure that our award winning happy hour remains relevant to our guests for years to come just as it was in the past.

These programs have gained great traction in markets like Tampa and we continuing to evaluate the program. On the construction and development front, we are diligently working to build our pipeline and we will continue to value sides both new and existing markets that meet our ROI targets.

The market is very competitive for Grade A size. While we have non new leases signed as of today, we are confident that we will be able to build a strong pipeline for future growth. As mentioned on private calls, we will update our target for new restaurant openings when leases are executed.

In September, we will begin construction on the remodel of our Chandler, Arizona location. This remodel will utilize our new design pallet and help us evaluate various design elements, materials, furniture, and fixtures as we look to remodel all the restaurants in 2013 to keep them inviting and attractive while also providing us an opportunity to incorporate similar design elements into our new restaurants.

The remodel is expected to be completed during the fall and we are excited about how the new design will be perceived by our guests. In conclusion, Kona Grill has never been stronger. We have solid sales momentum that is driving top of the industry of four-wall margins and bottom line profitability.

Our strategy as an organization remains clear; we plan to build a premier post casual concept that is distinguished by our award winning Sushi and new American cuisine as well as our significant bar business. We differentiate ourselves from our competitors by successfully executing three distinct businesses in four different day parts. I firmly believe that we now have the people and programs in place to drive strong earnings growth in 2012 and position us for even further success in the future. Thank you for your continued support.

Now, with that, I would like to open the call up for any questions you might have. Diana, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line Mike Malouf with Craig-Hallum. Please go ahead.

Mike Malouf - Craig Hallum

I had quick question with regards to same store sales guidance. I know you're up against some pretty hard comparisons but you have taken a 1.1% price increase. So 1%, I did the math, I guess that sort of assumes that traffic is sort of flat to down, is that sort of what you're expecting?

Berke Bakay

Well, I wouldn’t say down but it's more flattish and if you look our and compare to our last quarter’s guidance, which was 1% for the same store sales. You know, you could, with the 1.1% increase; you could extrapolate and say that’s the difference that we’re seeing in our business versus last quarter and this quarter.

Mike Malouf - Craig Hallum

Okay, great, and then and when you look out into 2012, you sort of at the very end mentioned, earnings growth in 2012, you know, you're pretty close to, I would think, pretty maximum, you know, operating income at almost 20% and sort of low single-digit comps. Would it necessary really produce any in the increase in earnings unless you are just very aggressive on share buybacks, so can you may be just comment a little bit on that?

Berke Bakay

Well I would disagree with that. If you look at our just this quarter G&A and while we were able to take the course out of our system, so to your point we are very healthy on our four-wall margins and we are where we need to be but regardless we were able to produce a $0.20 [quarter] and which is significantly higher than what we had last year I believe at $0.08. So that’s a significant improvement and so G&A savings we continue to, we expect to keep those savings and be very diligent on the way we approach our G&A, so I would disagree with the comment.

Mike Malouf - Craig Hallum

I guess I was talking about 2013 versus 2012 but I understand what you mean. When we take a look at sort of driving growth into 2013 just staying on that same thing obviously, we are going to hope that we get some growth on the top line driven by new restaurants; it sounds to me like obviously you said it’s competitive on the Class A you have been here for six months has it been more daunting of a challenge to find the right spot or you are just sort of doing the typical, is it just a typical amount of time that you had expected?

Berke Bakay

Sure, that’s a good question. Well when I walk in here at the end of January, there was a zero pipeline to speak of. So we actually had no potential locations that I would consider a pipeline. So as this standing here today after a work of six months, we have significant amount of locations that are in our pipeline, some of them have different timings. I am not just saying they are 2013 or 2014 opportunities but I am just talking to the general number of stores. So we made lot of progress from having nothing in our pipeline versus having great opportunities in our pipeline.

Again as we said previously, we will let the market know when we assign the leaders. So we are not giving you an exact timeline when that units in the pipeline will actually end up being growth, but I am happy regardless of the competition what we are able to produce in our pipeline today versus six months ago.

Mike Malouf - Craig Hallum

What do you think, you have the target number of stores could end up being for you, when you look out and I know that you are new, fairly new and obviously running the company but you have seen how the stores are running? How they produce in different geographic areas, and where does Kona you think eventually get to?

Berke Bakay

Sure. Well, let's look at the numbers. We operate 23 restaurants in 16 states, all of them we expect to be cash flow positive this year. We have only couple of markets that we have more than one store left look at Chicago market we have two stores there. We have Arizona market, we have four stores and Texas they have more than one store but they are in different cities. So, when I look at our business, I don’t see any reason why we shouldn’t be at these 100 units one day being in the top line of the markets in United States. So it's a theoretical number but if I had a 23 stores in 16 different states all of them working, I think that's a best way I can answer the question.

Mike Malouf - Craig Hallum

Operator

Thank you, and our next question comes from the line of Mark Smith with Feltl & Company. Please go ahead.

Mark Smith - Feltl & Company

Just a couple of quick ones. Of course, can you comment on the alcohol mix during the quarter?

Christi Hing

The alcohol mix continues to remain consistent at about 30% to 31% of sales.

Mark Smith - Feltl & Company

And just on ticket; can you comment at all, you know it’s been a quite a while since you've seen, since you guys have taken any price increases. Did you see the consumer pullback maybe on the average check or was it just a matter of just you haven't taken price on the check?

Christi Hing

We haven't taken price; I mean we've seen tickets still right around $24 to $25 range and that's been pretty consistent with where we’re running the last couple of years.

Mark Smith - Feltl & Company

And then just on current trends or maybe if you can talk about cadence of sales during the quarter; what did you guys see during the quarter as we move sequentially each month end and maybe you can comment on what you are seeing today?

Christi Hing

You know Mark I think we are pretty much in line with what a lot of our competitors have been you know we kind of follow some strong sales during Mother’s Day and some of the other kind of holiday event driven during the quarter. But overall, it’s fairly typical sales and no big swings kind of throughout the quarter.

Mark Smith - Feltl & Company

Okay, and for today if we look at maybe July?

Berke Bakay

Mark, we don't, as you know we don't talk about intra-quarter trends, but the guidance that we have given, you should assume that, we take into consideration what we see and give guidance accordingly.

Operator

Thank you. And our next question comes from the line of Lee Giordano with Imperial Capital.

Lee Giordano - Imperial Capital

Can you talk a little bit more about the Sushi business how that's performing and you know any concerns in Sushi as potential mix? Thank you.

Christi Hing

Sushi business has continued to be strong. We've been right around with 22% to 24% range and that has continued to remain strong in the second quarter. So, if anything, sushi is only getting stronger as a percentage of sales.

Lee Giordano - Imperial Capital

And how about food costs; have you seen any change there?

Christi Hing

We’ve seen some changes. We did enter into some contracts during the year. So we walked in some of our pricing on key items such as Tuna. So, it does not have a material impact as far as any kind of increase in our food cost for the quarter.

Lee Giordano - Imperial Capital

Okay, great, and then lastly, have you seen any differences in comp trends by geography? Thanks.

Christi Hing

You know, I think probably the markets that have remained strong is probably Texas. We continue to do well in Texas. I would say, Arizona was, we've been weak in Arizona for quite sometime and I think that trend still continues, but kind of throughout the country, we're probably in line with what we're seeing with many of our competitors as far as the strengths and weaknesses.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of David Kahn with Raymond James.

David Kahn - Raymond James

I had three different questions; I was wondering if you could make a comment on the take-out business in the quarter with the new initiatives; I was wondering if you would give us some type of a idea what your remodel costs are going to look like; I recognize with the year up, which you did mentioned you’re going to full remodels for 2013?

And of the 23 stores, I know your target is $4.5 million per store in revenue after you are up and operating for two years. How many of the stores are underperforming and do you have any state where you have all of the stores that are not at that $4.5 million level?

Berke Bakay

Sure. Well, let’s talk about, thanks for the questions, thanks for breaking them up. In terms of our take-out business, we have seen it take off a little bit during the quarter; but again, the initiative is new and we haven’t really gotten out and get the word out if you will. To me it's a function of time. We have some marketing initiatives on our take-out business in terms of at least letting our (inaudible) and Konavore members know that the take-out business is available and ready and given at a one-time kind of an offer to be able to take advantage. So that’s definitely in the works.

And I believe your second question was about in terms of the remodel cost; and when we’re talking about remodels, we’re always trying to keep our stores fresh. So when we talk about remodels, it's expansive remodels and you know you should see us right in the $0.5 million range and as we mentioned, we have several stores that maybe were opened six, seven, eight years ago that would significantly benefit from our remodel much, even much more from our new design of merchant ideas. So those are definitely in the works.

And I am going to have Christi, you know, we don’t talk store level numbers, but at least to give you an idea, I am going to refer to Christi to give you a sense on what percentage of our stores maybe are underperforming then our expectations of $4.5 million; because by its nature, you know, if they are having an average, we got some that are below and some at the higher, but I’ll have it adjust that.

Christi Hing

Yeah, probably about 40% of our stores are doing around the $4.5 million AUV and then there is another good handfuls that are knocking on the door doing in the $4 million range and then obviously there is a couple that are doing below that. So that’s a little bit of a breakdown on how our AUVs.

David Kahn - Raymond James

And Christi, with respect to individual states, is there any one state where you have a cluster of restaurants that are materially below that $4.5 million target?

Christi Hing

If you talk about materially, Arizona, and as I mentioned earlier is kind of lagging. They are around the $4 million range right now.

David Kahn - Raymond James

Is that -- well and I recognize that in those restaurants you have one restaurant that’s in a location that’s probably a very difficult location at this point. But if I took that one restaurant out, would their performance be in line with the rest of the states?

Christi Hing

Yes, they would be.

Berke Bakay

If anything it maybe above the average if you took that restaurant out.

Operator

Thank you. And we have a follow-up question from the line of Mark Smith with Feltl & Company. Please go ahead.

Mark Smith - Feltl & Company

Hi Christi, just to follow-up on the question on sea food cost, can you give us any idea on your outlook when do these contracts start rolling off; if we look at the next six, 12 months what’s your outlook with sea food cost?

Christi Hing

Yeah I believe I don’t have any information in front of me, but I believe these contracts go out at least six to 12 months. So our contracts are probably pretty -- we are probably pretty safe for the rest of the year.

Operator

Thank you. (Operator Instructions) And we do not have any questions at this time. I would like to turn it back over to Mr. Bakay. Please go ahead.

Berke Bakay

Thank you, Diana. As always, I want to thank each of you for joining us this afternoon. Thank you for your continued support of Kona Grill.

Operator

Ladies and gentlemen that does conclude today’s presentation. If you will like to listen to today’s replay phone number is 18778705176 and access ID 4552874. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Kona Grill's Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts