Kona Grill Inc. (KONA)

Q2 2010 Earnings Call Transcript

July 27, 2010 5:00 pm ET

Executives

Mark Robinow – CFO, EVP and Secretary

Marc Buehler – President and CEO

Analysts

John Dravenstott – KeyBanc Capital Markets

Rob Brown – Craig-Hallum

Shawn Bitzan – Feltl & Company

Presentation

Operator

Ladies and gentlemen, welcome to the Kona Grill second quarter 2010 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. As a reminder, this call is being recorded.

I would now like to turn the conference over to Mr. Mark Robinow, Chief Financial Officer. Please go ahead, sir.

Mark Robinow

Thank you, Melisa. Good afternoon, everyone. By now, you should have access to our second quarter earnings release. It can also be found on our website at konagrill.com under the Investor Relations section.

Before we begin formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition.

With that, I’ll turn the call over to Marc Buehler, our Chief Executive Officer.

Marc Beuhler

Thank you, Mark and thank you all for joining us today. During this call, we’d like to cover several items. First, I’ll open with some comments about the second quarter and provide an update on some of our current initiatives. Mark, will then discuss in detail our financial results as well as our guidance for the third quarter. And I will then wrap up the call with some final thoughts before turning the call over for questions and answers.

And with that, let me get started. Second quarter sales were $22.7 million, which was at the high-end of our revenue guidance of $21.7 to $22.7 million for the quarter. Same-store sales declined 0.3% during the second quarter compared with being down 9.5% last year and 2.5% last quarter. For the second consecutive quarter, we experienced positive traffic which demonstrates that our sales initiatives are working and they were building guest loyalty.

Over the past nine months, our check average has fallen about 7% due to a cautious guest spending pattern. We continue to stress the importance of value on our menu and have not taken any menu pricing during 2010. As a part of our menu evolution process that I will speak about momentarily, we are re-engineering several areas of the menu which will deliver more top line revenue while still being more mindful of the guest value that the guests are requesting.

Our net income for the period was $0.3 million or $0.03 per diluted share, which exceeded our previous expectations of a net loss between $0.01 and $0.06 per diluted share. If we exclude special charges of $160,000 in our G&A, net income was actually $0.4 million or $0.05 per share.

Either way, our second quarter marks the first time we’ve reported net income in almost three years. As we’ve discussed over the past few conference calls, our marketing initiatives are designed to create more buzz around our concept and thereby build top line sales. We have successfully engaged our customers through the use of Facebook, Twitter, Yelp, Urbanspoon and Foursquare and are leveraging these relationships to bring in new guests and increase the frequency of current guests.

During the second quarter, we held a very successful Sushi & The City event where guests were able to experience an extension of the onscreen excitement and glamour of the Sex and the City Sequel with a walk down the red carpet, specialty Samantha, Carrie, Charlotte and Miranda sushi rolls and door prizes.

We also held a raffle, which raised over $10,000 for Dress for Success, an international not-for-profit organization that promotes the economic independence of disadvantaged women. Our Konavore loyalty program continues its substantial growth and in just over 180 days has over 75,000 members. Considering our total footprint of 24 restaurants, this amounts to an average of over 2,500 loyal guests per location.

Once we complete our transition to a card based program, the program will become even more effective as we will be able to learn more about our users and target them with specific messages designed to encourage additional dining occasion. Due to the coming legislative changes related to card based loyalty programs and gift cards, we now anticipate this transition to incur in early 2011.

We are also in the midst of a comprehensive menu evolution project to improve the wild factor and enhance the flavor profile of many food items. We’re almost complete with phase one, which include tweaks to appetizers, salad and the introduction of a couple of new desserts. The menu updates have undergone comprehensive guest feedback in fixed restaurants over the past month and are scheduled to rollout system-wide in early August. Phase two of this project involves refinement to our pieces and sandwiches and the addition of several new menu items which will begin testing next week.

Our alcoholic beverage program, which as you know, accounts for approximately 31% of our total sales is in the midst of a total rework to ensure that we are forward leading with our beer and cocktail offerings and that we are not following in that category. Our wine and sake programs will also be rework as a part of the menu evolution process.

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