Kona Grill, Inc. (KONA)

Q4 2010 Earnings Call Transcript

February 10, 2011 5:00 pm ET

Executives

Mark Robinow – CFO

Marc Buehler – CEO

Analysts

Mike Malouf – Craig-Hallum Capital Group

Mark Smith – Feltl

Presentation

Operator

Good afternoon, everyone and thank you for joining us today to discuss Kona Grill Results for the Fourth Quarter ending December 31, 2010. Joining us today are Marc Buehler, Kona’s Chief Executive Officer and Mark Robinow, the chiefs – I’m sorry the company’s Chief Financial Officer. Following their remarks, we will open the call to your questions. (Operator Instructions)

Before we begin, I would like to remind everyone that this will be available for replay through February 17, 2011 starting later this evening. I would now like to turn the call over to Chief Financial Officer of Kona Grill, Mark Robinow. Please go ahead, sir.

Mark Robinow

Thank you, Dave. Before we begin formal remarks, I need to remind everyone that the financial guidance, the company provides versus first quarter 2011 results, statements regarding the company’s future sales, future profit or loss and expectations regarding same store sales are forward looking.

We have attempted to identify these statements by using forward-looking terminology such as may, will, anticipate, expects, believes, intend, should or comparable terms. All forward-looking statements made during this call are based on information available to the company as of today and the company assumed no obligation to update these forward looking statements for any reason.

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 full discussion of risks and uncertainties associated with the forward-looking statements and the discussion of risk factors contained in the company filings with the SEC.

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

Marc Buehler

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 general comments about the fourth quarter then I’ll turn the call back over to Mark, who will discuss the financial details for the quarter as well as provide some guidance for the first quarter of 2011. I will then wrap up the call with an update on the some of our current initiatives and then provide some final thoughts before turning the call over for Q&A. With that, let’s get started.

We ended 2010 on a strong note delivering solid top-line results fueled by a 6.4% increase in same-store sales. This compares to a decline of 8.1% in Q4 of last year and flat same-store sales in the third quarter of 2010. These results are encouraging and we have certainly enjoyed increased momentum over the past several months driven by menu improvement and marketing initiatives aimed at building awareness and guest frequency.

The recent quarter was also the fourth consecutive quarter that we experienced positive traffic trends, which we believe demonstrate the strength and popularity of the Kona Grill brand. Our food based promotions helped increase guest check marginally, however, we continue to see check management in this uncertain, but improving economic environment. We took minimal menu pricing to help mitigate some of the impact of rising commodity cost.

Now before we go much further, I'll turn the call back over to Mark who will take us through the financial details for Q4.

Mark Robinow

Thanks Marc. For the fourth quarter ended December 31, restaurant sales increased 11.2% to $22.2 million, reflecting additional revenue from one restaurant opened during the quarter and a 6.4% increase in comparable restaurant sales.

As Marc mentioned, strong guest traffic throughout the quarter holstered by marketing and menu improvement initiatives drove higher comparable sales. While we do not report monthly comparable restaurant sales, comps for all three months of the quarter were solidly positive with over 75% of our comp based stores reporting positive comp sales. Many of these restaurants turned in double digit growth.

We took about 1.7% in price during the quarter. Going forward, we believe we have the ability to take additional pricing to offset higher commodity cost. We also intend to continue rolling out new products with high quality ingredients, which maybe at higher price points.

Overall, we have seen our comps improved sequentially in each of the last four quarters and are optimistic that this momentum can continue. We are pleased to report an increase in comparable restaurant sales of 0.9% for the full year aided by strong Q4 numbers.

Cost of sales as a percentage of restaurant sales increased 220 basis points to 28.4% during the fourth quarter from 26.2% last year. As discussed during our Q3 call, we continue to see significant year-over-year increases for beef and chicken, while salmon and sea bass prices also spiked during the quarter.

We estimate half of the 220 basis point increase was due to higher commodity prices and the other half driven by upgrading the quality of ingredients. We're beginning to contract prices for certain commodities for 2011. However, as you are probably aware, no contracts are available for certain seafood products.

We continue to monitor the impact of both short and longer term commodity pricing for all seafood and intend to adjust menu offerings and price accordingly. Labor expenses, as a percentage of restaurant sales, decreased 210 basis points to 34.8% during the fourth quarter from 36.9% last year. The lower labor cost percentage is attributable to the leveraging of fixed management wages, hourly labor and benefit costs from the 6.4% increase in comp sales.

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