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Kona Grill: A Sake Bomb and Sushi Story

|Includes: Kona Grill, Inc. (KONA)

Kona Grill (NASDAQ:KONA) is a unique dining establishment attempting to expand and become a popular dining chain in a tough economic environment. The drinks are great, the food is good, and the prices are fantastic at happy hour. My experience at the Kona Grill in San Antonio is that during happy hour it is so crowded you cannot fit in the restaurant. This obviously bodes well for restaurants in popular locations, and should help subsidize the underperformance of some restaurants in more challenged areas until they can be closed or business picks up. The question I have to ask myself is whether or not this exciting and trendy restaurant concept can withstand the test of time; and if the new management team in place is competent enough to make the business a consistently profitable one. This would allow them to expand their concept from the current 21 locations to many across the US and abroad- letting the shareholders rake in the phenomenal profits that we all dream of.

Investing in KONA right now is definitely a speculative play, but I think for a variety of reasons it could turn out to be a highly profitable one. The restaurant does have the street credibility and 'wow' factor that many other chains covet. The younger demographic of the population are enthusiastic about the restaurant and are loyal visitors. The sake bombs are fantastic and help facilitate your good experience, and for only $7.00 at happy hour you can't beat it (They are massive). Check out the company's menu here:

My current belief is that this is a turnaround story that will take time to develop into a truly solid business; but with the potential for current shareholders to be rewarded handsomely for their patience. You are investing into the concept of what Kona Grill stands for, rather then the standard metrics and analysis by which most professionals quantify a business. Being a microcap stock with a market capitilization of only $30 million, a new management team in place, and many of the stores being the anchor in somewhat empty shopping centers, there is plenty of room for improvement in the business' fundamentals.

Another possibility is that the firm Mill Road Capital tenders another offer to buy the majority or entirety of the franchise. They have already tried twice, at much higher prices than where KONA currently trades, and are claiming there was mismanagement for not maximizing shareholder value:

"Kona Grill, Inc. (KONA, Free Analysis), owner and operator of 21 upscale dining restaurants across 13 states, is facing further pressure from Mill Road Capital, which owns 9.8% of the firm. The activist hedge fund sent a letter to the board on March 10th demanding the opportunity to make copies of certain books and records related to the resignation of Marcus E. Jundt. The move also follows several attempts by Mill Road to acquire Kona Grill at prices ranging from $10.75 in March of 2008 to $4.60 per share in May of 2009. While even its most recent offer was 101% above the closing price a day earlier, the company has seemingly refused to entertain the proposal and unlock shareholder value."

In addition, the latest conference call was not the most inspiring, but I believe management was being honest and down to earth in their discussion of the potential of the franchise. This includes candid disclosure of some of the biggest problems the firm has faced.

"The restaurants – some of the restaurants we've opened in the last 18 months have opened in newer real estate developments, where we may be the anchor tenant now and that was certainly not the intention when we went into those properties. So again, I think, as the real estate market continues to improve, which hopefully it will later this year. We hopefully, will be able to drive higher top line sales into those restaurants. Just really a factor of poor timing from a real estate standpoint on, where we located some of our more recent restaurants." - Marc Buehler – President and CEO, on the latest Conference Call:

I think buying shares of KONA here at the $3.00-$3.50 level offers a decent risk-to-reward entry into a company that has high quality offerings and potentially huge growth prospects. The concept of offering healthy, delicious, and fun choices as well as an exciting and trendy atmosphere seems to be working in the locations that are fully developed, and bode well for their newer openings and initiatives. With an upturn in the economy, continued development and changing of the menu, continued use of popular promotions, and a CEO who truly wishes to unlock shareholder value; Kona Grill could be a growth stock with fantastic gains in the future.

Disclosure: No current position