Kona Grill CEO Discusses Q3 2011 Results - Earnings Call Transcript

Kona Grill, Inc. ( KONA)

Q3 2011 Earnings Call

October 25, 2011 5:00 p.m. ET

Executives

Mark Robinow - EVP, CFO and Secretary

Mike Nahkunst - Interim President and CEO

Larry Ryback - COO

Analysts

Lee Giordano - Imperial Capital

Mike Malouf - Craig Hallum

Mark E. Smith – Feltl and Company, Inc.

Conrad Lyon - B. Riley & Co

Presentation

Operator

Good afternoon, everyone, and thank you for joining us today to discuss Kona Grill’s results for the third quarter ended September 30, 2011. Joining us today are Mike Nahkunst, Kona’s 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 conference over to the Chief Financial Officer of Kona Grill, Mark Robinow. Please proceed, sir.

Mark Robinow

Thank you. Before we begin formal remarks, I need to remind everyone that the financial guidance the company provides for its fourth quarter 2011 result, including statements regarding the company's future sales, future profit 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 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 Securities and Exchange Commission.

I would like to welcome Larry Ryback, our Chief Operating Office, who will be joining us for the Q&A portion of the call. .

With that, I’ll turn it over the call to Mike Nahkunst, our new Chief Executive Office.

Mike Nahkunst

Thank you, Mark, and thank all of you for joining us today. I’ll start with some brief comments about our third quarter results. Mark will then discuss the financial details for the quarter, as well as provide some guidance for Q4. I’ll then wrap up the call with an update on some of our current initiatives and provide some final thoughts before turning the call over for Q&A.

Now with all that, let’s begin. For the third quarter we continued our strong sales momentum by delivering solid topline results, driven by a 10.6% increase in same-store sales. This increase in same-store sales follows a 9.1% increase in Q2, a 7.6% increase in Q1, and a 6.4% increase in Q4 of last year.

In fact, the third quarter represents the eighth consecutive quarter, a sequential improvement in our same-store sales. We continue to experience favorable sales trends that are being driven by our food-based promotions, restaurant remodels, and service and hospitality initiatives.

The third quarter was also the seventh consecutive quarter that we experienced positive traffic trends, which we believe demonstrates the strength and popularity of the brand in multiple markets.

During the third quarter we were able to leverage our double-digit comps to drive strong earnings for the quarter. This positions us well for a profitable 2011.

I would now like to turn the call over to our CFO, Mark Robinow, who will take us through the financial details for Q3. Mark.

Mark Robinow

Thanks, Mike. For the third quarter ended September 30, restaurant sales increased 15.9% over the same year-ago period to 23.8 million reflecting additional revenue from the Baltimore location opened last fall, and the 10.6% increase in comparable restaurant sales.

The increase in same-store sales is attributed to higher average guest check driven by our food-base promotion and 2.5% growth in guest traffic. The sales increase includes about 3.3% in pricing as we took about 150 basis points in June to offset higher commodity cost and 180 basis points last fall.

As Mike mentioned, our comps have improved sequentially in each of the last eight quarters. We believe that our same-store sales will continue to outperform our peer group through the final quarter of 2011. However, the comp comparison becomes a bit more difficult as we rollover last year’s 6.4%.

Cost of sales as a percentage of restaurant sale decreased 60 basis points, 26.7% during the third quarter from 27.3% last year. The decrease is attributable to pricing leverage, various purchasing, and culinary initiatives as well as lower year-over-year pricing for beef and chicken.

We are continuing to work diligently with our vendors to ensure the best pricing available and reasonable delivery charges.

Labor expense as a percentage of restaurant sales decreased 160 basis points to 32.8% during the third quarter from 34.4% last year. The labor cost percentage is attributable to the leveraging of fixed management wages and hourly labor, from the 10.6% increase in comp sales.

Restaurant opening expenses as a percentage of restaurant sales decreased 130 basis points to 14.8% during the third quarter from 16.1% last year. The lower operating expense percentage is primarily due to lower marketing expenses and the leveraging of the fixed portion of these operating cost through higher sales volumes.

We expect operating expenses to increase in Q4 as we plan to incur approximately 100,000 in uncapitalized remodeling expenditures for two restaurants.

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