Kona Grill Inc.
) recently reported second quarter 2012 earnings of 22 cents per
share, which comprehensively beat the Zacks Consensus Estimate of
15 cents and improved substantially from the year-ago earnings of
11 cents per share.
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Total restaurant sales in the quarter were $25.0 million, up 2.0%
year over year but in-line with the Zacks Consensus Estimate. The
upside in sales can be traced back to a 2.3% increase in same-store
sales, buoyed by growth in guest traffic, offset somewhat by lower
average guest check which was affected by the Happy Hour
Same-store sales growth of 2.3% in the quarter came on the top of
9.1% in the second quarter of 2011 and 8.7% in the previous
quarter. This also represents the seventh consecutive quarter of
positive same-store sales. However, a fire breakout in the Troy
restaurant in Michigan in early May also hampered same-store sales
in the quarter, resulting in a loss of around $200,000 in
sales. Before the catastrophe, Troy's sales were up double
Restaurant operating profit margins increased 100 basis points
(bps) to 19.4% in the reported quarter attributable to cost
containment efforts. The company's expenditures were palpably less,
with cost of sales remaining flat year over year, occupancy costs
and restaurant operating expenses falling 90 bps to 6.2%, 30 bps to
14.2%, respectively, based on total revenue. However, only labor
expenses provided a partial offset by increasing 20 bps to 32.9%.
Notably, cost of produce in the quarter was lower year over year,
but the gain was offset by higher beer and wine costs related to
Happy Hour promotions. The company's operating margins saw a
further increment of 390 bps to 7.5% owing to considerable decline
in general and administrative costs as well as depreciation and
amortization as portion of revenue.
At quarter-end, Kona Grill currently owns and operates 23
restaurants in 16 states.
Kona Grill ended the quarter with current assets of $9.6 million
and long-term obligations of $13.0 million.
During the second quarter, Kona Grill bought back 95,500 shares at
an average cost of $7.93 per share as part of the company's $5
million stock repurchase program which commenced in May 2012.
For the third quarter of 2012, the company expects total restaurant
sales of $24.1 million. The guidance considers approximately 1%
same-store sales increase as the company will overlap 10.3% comps
from last year. Earnings per share is expected to be 12 cents per
We remain impressed with the company's profit momentum and
continuous market share gain in a highly competitive bar and grill
segment. The company enters the third quarter by exercising 1.1%
pricing on new menus. The new pricing action came after 14 months.
The company is also assessing untapped opportunities in new and
Kona Grill, which competes with the likes of
) also embarked upon several strategies like offloading
unprofitable locations, restaurant remodeling and promotions in an
attempt to create awareness and accelerate traffic.
However, management expects a tough comparison in same-store sales
in the upcoming quarter. A back-to-school season will make the
third quarter seasonally weak. However, we maintain our long-term
Outperform recommendation on the stock.