Kona Grill, Inc. ( KONA)

Q3 2010 Earnings Call Transcript

October 26, 2010 5:00 pm ET

Executives

Mark Robinow – EVP, CFO and Secretary

Marc Buehler – President and CEO

Analysts

Rob Brown – Craig-Hallum

John Dravenstott – KeyBanc Capital Markets

Mark Johnson [ph] – William Blair

Mark Smith – Feltl & Company

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Kona Grill third 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.

Mark Robinow

Thank you, Matt. Good afternoon, everyone. By now, you should have access to our third quarter earnings release. It may 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 third 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 fourth quarter. I will then wrap up the call with some final thoughts before turning the call over to you for some questions and answers. And with that let's begin.

Third quarter sales were $21.6 million which exceeded the high-end of our revenue guidance by about $100,000. Same-store sales were flat during the third quarter compared to down 9.9% in the third quarter last year and down 0.3% in the second quarter of 2010. Even more encouraging however is the fact that same-store sales were up 3.5% in September and this trend has continued thus far into October, as we are getting very positive guest feedback from our recently introduced new menu items which I will address shortly.

The recent quarter was also the third consecutive period that we have experienced positive traffic trends, which will, I believe will demonstrate the strength and popularity of this brand. Unfortunately guests continue to manage their check in this uncertain economic environment which resulted in the overall flat sales. We did however take minimal about 1% menu pricing near the end of the quarter that will mitigate the impact of rising commodity costs and give a boost to our average check. Our net loss for the quarter was $400,000 or $0.05 per share which also exceeded our guidance of a loss between $0.5 million and $1 million.

If we were to exclude pre-opening expenses, for the recently opened Baltimore restaurants, our bottom line would have been within $60,000 of breakeven for the quarter. Speaking of Baltimore, we opened this beautiful restaurant near the Inner Harbor in early the fourth quarter on October 5. While it has only been three weeks since the opening itself, we are very pleased with the initial sales volumes and have great confidence in the team to deliver a great guest experience to all of our new guests. This restaurant also incorporates many new design elements that we plan to incorporate in future restaurants and in remodels such as a video wall (inaudible) feature and brighter interior finishes.

From a cost perspective, we experienced sharply higher commodity costs for our core menu items during the third quarter which Mark Robinow will detail momentarily. All together we estimate that higher prices had a negative 100 basis points affect on the cost of sales. As mentioned on our last call, we have enlisted the services of an outside purchasing group to help us streamline and consolidate our supply chain and leverage our purchasing power. For the first time in our history we are working on contracting prices for certain commodities for 2011 and a negotiating savings on other products.

We will look for positive results from these efforts beginning in the first quarter of 2011 although we still foresee commodity costs as a percentage of sales to be unfavorable on a year-over-year basis given underlying trends. That said, we expect to be able to use our menu evolution process to justify at least a couple of menu price increases in 2011 which will also help mitigate higher commodity costs although this still remains to be seen.

During September, we participated in Share Our Strengths Great American Dine Out, where donations from guests, team members, board and a dollar contribution from every Berries & Cream Dessert sold raised $28,000 for the nationwide No Kid Hungry Mission. We are pleased to be involved in such a worthy cause while at the same time realizing a lot of positive PR for our company in being socially active in the communities that we serve. We look forward to continued participation in this noble effort to end childhood hunger in America by 2015.

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