Kona Grill CEO Discusses Q1 2011 Results - Earnings Call Transcript

Kona Grill, Inc. ( KONA)

Q1 2011 Earnings Call

April 27, 2011 5:00 pm ET

Executives

Mark S. Robinow – Executive Vice President, Chief Financial Officer and Secretary Marc A. Buehler – President and Chief Executive Officer

Analysts

Lee J. Giordano – Imperial Capital, LLC

Mark E. Smith – Feltl and Company, Inc.

Mike Malouf – Craig-Hallum Capital

Will Slabaugh – Stephens

Presentation

Operator

Good afternoon, everyone, and thank you for joining us today to discuss Kona Grill’s Results for the First Quarter Ended March 31, 2011.

Joining us today are Marc Buehler, Kona’s Chief Executive Officer and Mark Robinow, the Company’s Chief Financial Officer. Following the remarks, we will open the call up to your questions. (Operator Instructions)

I would now like to turn the call over to the Chief Financial Officer of Kona Grill, Mark Robinow. Sir, please proceed.

Mark S. Robinow

Thank you. Before we begin our formal remarks, I need to remind everyone that the financial guidance the Company provides for its second 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, intends, 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 assumes 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’s filings with the SEC.

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

Marc A. 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 our first 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 Q2. I’ll then wrap up the call with an update on some of our current initiatives and then provide some final thoughts before turning the call over for Q&A. Now, with that let’s begin.

We had a strong start to 2011 with solid top line results driven by a 7.6% increase in same-store sales. This increase in same-store sales follows a 6.4% increase in the fourth quarter of last year and represents the sixth consecutive quarter of sequential improvement in our same-store sales.

We’re encouraged by the 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 fifth consecutive quarter that we experienced positive traffic trends, which we believe demonstrates the strength and popularity of the brand. During the first quarter, we were able to leverage our operating margins through higher sales volumes, although spikes in seafood and produce prices prevented us from realizing the full benefit of these higher sales volumes. We continue to believe that if current sales trends continue we will be profitable in 2011.

I would now like to turn the call back over to our CFO, Mark Robinow, who will take us through the financial details for Q1. Mark?

Mark S. Robinow

Thanks, Marc. For the first quarter ended March 31, restaurant sales increased 12.3% to $23.6 million reflecting additional revenue from the Baltimore location open last fall, higher sales for restaurants not in the comp base and a 7.6% increase in comparable restaurant sales.

The increase in same-store sales is attributed to strong guest traffic throughout the quarter and a higher average guest check. The sales increase includes about 2% pricing, which we took last fall. Going forward, we believe we have the ability take additional pricing to offset higher commodity cost. We also intend to continue rolling out new menu offerings, with high quality ingredients, which may be at higher price points.

As Marc mentioned, our comp sales improved sequentially in each of the last six quarters. We believe that we can continue strong sales momentum throughout the remainder of 2011. However, continued sequential improvement becomes more difficult as we roll over last year’s improvement.

Cost of sales as a percentage of restaurant sales increased 170 basis points to 28.2% during the first quarter from 26.5% last year.

As you are probably aware hard freezes in California, Texas and Mexico resulted in significant spikes in produce this quarter. We also experienced higher year-over-year increases for Tuna, Sea bass, Salmon, and the other seafood.

We have contracts in place for beef, shrimp, and calamari and are working with our vendors to firm up pricing for other seafood products. We are working with these vendors to ensure we get the best pricing available and reasonable delivery charges.

Labor expenses as a percentage of restaurant sales decreased to 180 basis points to 34.2% during the first quarter from 36.0% last year. The lower labor cost percentage is attributable to the leveraging of fixed management wages, hourly labor and benefit cost from the 7.6% increase in comp sales. We expect labor as a percentage of sales to improve incrementally as we leverage these costs through higher sales.

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