Kona Grill, Inc. ( KONA)

Q2 2011 Earnings Call

July 27, 2011 5:00 PM ET


Mark Robinow - EVP, CFO and Secretary

Mike Nahkunst - Interim President and CEO


Ross Licero - Craig-Hallum

Conrad Lyon - B. Riley & Co

Lee Giordano - Imperial Capital



Good afternoon everyone and thank you for joining us today to discuss Kona Grill’s Results For The Second Quarter Ended June 30, 2011. Joining us today are Mike Nahkunst, Kona’s Interim President and Chief Executive Officer and Mark Robinow, the Company's Chief Financial Officer. Following their remarks we will open the call up for 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 go ahead.

Mark Robinow

Thank you Ron. Before we begin our formal remarks, I need to remind everyone that the financial guidance the company provides for the third quarter 2011 results statements regarding the company's future sales, future profits and expectations regarding same-store sales are forward-looking.

We have attempted to identify these statements by using forward-looking terminologies such as may, will, anticipate, expect, 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 obligations 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 statement. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements and the discussion of risk factors contained in the company's filings with the SEC.

I would like to take a few moments to introduce Mike Nahkunst, our Interim President and Chief Executive Officer. Many of you know Mike from his days at Chilies during their early growth period, as well as his executive level operating roles at BJ’s, Cheesecake Factory and Max & Erma. Mike joined our board in November 2010 and was asked by our board to take on the CEO role when Mark Buehler resigned last month. We are happy to have Mike is with us and appreciated his knowledge and experience in guiding us as we re-initiate growth and profitability.

With that, I’ll turn it over the call to Mike, welcome Mike.

Mike Nahkunst

Thank you, Mark and thank all of you for joining us today. I’ll start with some general comments about our second quarter results and then Mark will discuss our financial details for the quarter as well as provide some guidance for Q3. I will then ramp up the call with an update of some of the current initiatives and then provide some final thoughts before turning the call over for Q&A. Now with that, let’s begin.

We continued our strong sales momentum delivering solid top line results driven by a 9.1% increase in same-store sales. The strong increase in same-store sales follows the 7.6% increase in Q1 and a 6.4% increase in Q4 of last year and represent the seventh consecutive quarter of sequential improvement in our same-store sales.

We continue to experience favorable sales momentum, that is driven by our many improvement, our restaurant remodels, and marketing initiatives aimed at building awareness and guest frequency. The recent quarter was the sixth consecutive quarter that we experienced positive traffic trends, which we believed demonstrates the strength and the popularity of the brand in multiple markets. During the second quarter, we were able to leverage higher average weekly sales to drive stronger earnings for the quarter. We continue to believe, we will be profitable for 2011.

I would now like to turn the call over to our CFO, Mark Robinow, who will take us to the financial details for Q2. Mark?

Mark Robinow

Thanks, Mike. For the second quarter ended June 30, restaurant sales increased 13.6% to 25.8 million reflecting additional revenue from the Baltimore locations over the last fall.

Higher sale for two restaurants not in the comp base and a 9.1% increase in comparable restaurant sales. The increase in same store sale is attributed to strong guest traffic and higher average guest check aided by our new food and beverage items rolled out in May for a Slim Chance promotion. The sales increase includes about 2.2% in pricing as we took about 150 basis points in June to offset higher commodity cost. As Mike mentioned our comps have improved sequentially in each of the last seven quarters.

We believe that we can continue strong sales momentum throughout the remainder of 2011, however the continued sequential improvement becomes more difficult as we roll over last year strong fourth quarter.

Cost of sales as a percentage of restaurant sales increased 90 basis points to 27.4% during the second quarter from 26.5% last year. We continue to see higher year-on-year cost for Salmon and Sea bass, while certain produce and dry good items also were higher compared to last year.

We improved cost of sales 80 basis points from the first quarter this year as we continued to work diligently with our vendors to ensure the best pricing is available and reasonable delivery charges are set. Labor expenses as a percentage of restaurant sales decreased 110 basis points to 33.2% during the second quarter from 34.3% last year.

The lower labor cost percentage is attributable to the leveraging of fixed management wages and hourly labor from a 9.1% increase in comp sales. Restaurant operating expenses as a percentage of restaurant sales decreased 10 basis point to 15.0% during the second quarter from 15.1% last year. The lower operating expenses percentage was primarily due to the leveraging of the fix portion of these operating costs through higher sale volumes.

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