Kona Grill's Discusses Q2 2012 Results - Earnings Call Transcript

Kona Grill Inc. (KONA)

Q2 2012 Earnings Call

July 27, 2012 05:00 pm ET

Executives

Berke Bakay - President & CEO

Christi Hing - CFO

Analysts

Mike Malouf - Craig Hallum

Mark Smith - Feltl & Company

Lee Giordano - Imperial Capital

David Kahn - Raymond James

Presentation

Operator

Good afternoon and thank you for joining us to discuss Kona Grill’s results for the second quarter of 2012. Joining us today are Berke Bakay, Kona’s President and Chief Executive Officer; and Christi Hing, the company’s Chief Financial Officer.

Following their remarks we will open up the call for questions. (Operator Instructions) Before I begin, I would like to remind everyone that the financial guidance the company provides for its third quarter 2012 results, statements regarding the company’s future sales, profits, and expectations regarding same-store sales are forward-looking.

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 statements to reflect events or circumstances after the date of this call.

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 discussion to risk and uncertainties contained in the company’s filings with the Securities and Exchange Commission.

I would now like to turn the conference over to Kona Grill’s President and CEO, Berke Bakay. Please go ahead.

Berke Bakay

Thanks, Anna. Good afternoon and thank you all for joining us. We continued our strong momentum during the second quarter with same-store sales comps of 2.3%. Our positive comps during the quarter represent Kona Grill’s seventh consecutive quarter of positive same-store sales and the 10 th consecutive quarter of positive traffic, which we believe demonstrates the strength and momentum of our brand in multiple markets. We were able to leverage the strong sales growth to drive top-tier unit level margins of 19.4% as well as $0.28 in EPS which is an all-time record for our company. As mentioned in our press release, excluding the impact of the Troy fire, our unit level margins were 20%, which we believe is one of the best in the polished casual segment.

It is also important to point out that our earnings for the first half of 2012 have already exceeded our full-year 2011 earnings by over 45%. We believe these strong earnings are a direct result of offsetting performance from each of our restaurants as a result of company-wide operational initiatives and discipline spanning.

For today’s call, Christi will walk us through the financials for the second quarter and provide guidance for the third quarter of 2012. Afterwards I'll provide and update on some of the initiatives we're working on and then wrap up the call with Q&A.

With that, I'll like to turn the call over to Christi. Christi?

Christi Hing

Thanks, Berke. For the second quarter ended June 30, 2012, restaurant sales increased 2% over the same-year ago period to $25 million, reflecting a 2.3% increase in comparable restaurant sales. The increase in comp sales represents a 250 basis point increase in guest traffic during the quarter or average check declined about 20 basis points due to some of our Happy Hour initiatives.

We're pleased with our Q2 comps given that we’re lapping 9.1% comps from last year. It is important to note that sales for the quarter were impacted by our fire at our Troy Michigan restaurant in early May. We estimate that approximately $200,000 in sales were lost during the quarter due to the closure of the restaurants for 3.5 days and the lost sales caused by the partial closure of the patio through the end of June.

All Troy sales numbers are excluded from our comp-based calculations for the effected period, there is no doubt that the fire impacted our reported results as Troy sales were up double-digits prior to the fire.

Despite the current economic headwinds, our comps continue to remain resilient as the second quarter represents our seventh consecutive quarter of positive same-store sales and on a trailing two-year basis, our Q2 comps are up over 11%.

For Q3, the comp comparison continues to remain difficult as we lapped 10.3% comps in Q3 of last year. To help combat the difficult comp comparisons, we are taking 1.1% in price on our new menu that rolls out tomorrow. It's important to note that the last time we've taken price was 14 months ago.

Cost of sales as a percentage of restaurant sales were flat at 27.3% for the second quarter. Produce pricing for the quarter was lower versus the same period last year or was offset by higher beer and wine cost associated with Happy Hour promotions and the half bottles of wine offered during our Wine Down Wednesday program in selected markets. Berke will provide additional color on these programs in his remarks. We continue to work diligently with our vendors to negotiate contracts that ensure the best possible pricing.

As discussed on our last call, for 2012, we are optimistic that improvements in seafood purchasing and other initiatives will help mitigate any material impact to food cost for the remainder of the year. A variety of menu items helps insulate us from commodity cost pressures that some of our competitors are facing. Over 54% of our sales are from the bar and sushi, which is a significant differentiation factor for most of our competitors. We continue to monitor drought conditions throughout the country and their potential impact on food cost going forward.

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