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Mrinalini Chaudhuri
Mrinalini Chaudhuri
Articles (512) 

Investors Should Consider This Restaurant Stock

Kona Grill reported strong 4th quarter with positive same-store sales growth

March 11, 2016 | About:

Kona Grill (NASDAQ:KONA) offers guests freshly prepared food, personalized service and a warm contemporary ambiance that creates an exceptional, yet affordable dining experience.

The menu offers a diverse selection of appetizers, salads, sandwiches, chicken, seafood, steaks, pasta and pizzas that incorporate over 40 signature sauces and dressings that are made from scratch using high-quality, fresh ingredients. Kona Grill also offers guests a wide selection of award-winning sushi, including sashimi, traditional favorites and several proprietary dishes.

It features American favorites with an international influence and award-winning sushi in a casually elegant atmosphere. Kona Grill owns and operates 31 restaurants.

Its sophisticated and diverse menu boasts a wide array of options for guests with all tastes – freshly prepared sushi, innovative American grill fare and comprehensive selection of cocktails.

It boasts of exceptional customer loyalty. According to the company’s website, 17% of guests dine at Kona at least once every 10 days. It is a leading retail center with 15 million annual visitors; half the visits include dining.

The company reported a strong fourth quarter and is poised to grow. The company experienced same-store sales growth of 3.2%, which is an indication of concept strength, especially given recent industry trends, and enabled it to extend its track record of positive same-store sales growth to 11 consecutive quarters and in 21 of the last 22 quarters. It also exceeded projections for Adjusted EBITDA, which grew 19.4% from the prior-year quarter.

Strong fourth quarter

Restaurant sales in the fourth quarter of 2015 increased by 20.6% and were $38.1 million ($31.6 million in the prior year quarter). The increase was driven by operating week growth of 21.2% and a same-store sales increase of 3.2%. The increase in same-store sales reflects higher average check per customer and was partially offset by a slight reduction in traffic. Same-store sales increased 3.1% in the year-ago quarter.

Average weekly sales for the comparable base restaurants totaled $83,700 in the fourth quarter of 2015 ($82,600 in the prior-year quarter). Average weekly sales for 11 noncomparable base restaurants in the fourth quarter of 2015 totaled $79,700 compared to $85,600 for seven noncomparable restaurants in the fourth quarter of 2014.

Restaurant operating profit, a non-GAAP measure, increased by 5.9% in the fourth quarter of 2015 and was $5.6 million (which was $5.3 million in the prior year quarter). As a percentage of sales, restaurant operating profit was 14.7% (which was 16.7% in the prior year quarter).

Adjusted EBITDA, a non-GAAP measure, increased by 19.4% in the fourth quarter of 2015 and was $2.9 million (which was $2.4 million in the prior year quarter). Net loss in the fourth quarter of 2015 was $2.0 million, or 18 cents per share, which was a net loss of $0.9 million, or 8 cents per share, in the prior-year quarter. Included in the fourth quarter of 2015 net loss was 13 cents per share in preopening costs primarily for four restaurants opened during the quarter.

On Dec. 31, 2015, cash and cash equivalents totaled $9.1 million compared to $36.6 million on Dec. 31, 2014. The company had no outstanding borrowing on its $35 million line of credit as of Dec. 31, 2015.

Expectations for 2016

The company expects the following:

  • Restaurant sales to be around $179 million ($143 million in 2015), representing 25% year-over-year growth. The increase in restaurant sales will be driven by operating week growth along with an estimated 2.0% same-store sales growth.
  • Adjusted EBITDA to be around $15 million, representing 25% year-over-year growth.
  • Capex to be around $33 million to $35 million.

A peek into the restaurant industry

Eating out has become a fashion now, and perceptions have changed. There is a constant rise in the disposable income of people around the world, and eating out is comforting, too.

According to reports, the U.S. economy surged by 5% in the third quarter of 2014 (since 2003, this has been the strongest three-month period). Consumer behavior has changed and so the restaurants have come up with different marketing strategies – loyalty programs, ordering, etc.

As per the National Restaurant Association, restaurant industry sales are expected to reach $783 billion in 2016 and will represent the seventh consecutive year of real growth in restaurant sales. Further, the National Restaurant Association has predicted that the restaurant industry will remain the nation’s second-largest private sector employer with a workforce of 14.4 million and will create 1.7 million new restaurant jobs by 2026.

On a concluding note

The company reported another solid top line result. Noncomparable restaurants continue to perform ahead of the company’s internal forecast both on the top line and through the realization of operating efficiencies as trends shift toward normalized and identifiable patterns. It has planned a 20% growth initiative for the next few years.

It opened four restaurants during the fourth quarter, a total of seven restaurants in 2015, and is on track to open eight restaurants in 2016. It is well positioned to grow domestically through robust pipeline and to develop internationally through franchising. It has already executed an agreement for six restaurants in Mexico over the next seven years. It is working to finalize an agreement for the Middle East and holding ongoing discussions with potential franchisees for other territories.

Restaurant stocks are booming, and this company is no exception. Perceptions have changed as regards the way people eat out. This company posted solid quarterly report and is expected to create shareholder returns in the near future. Investors may add this company to their portfolios.

This American grill and sushi bar has huge potential and is currently focusing on brand building and expansion. It is a long-term stock. Now people are more health conscious, and this company boasts of an array of healthy food options. The company boasts of new menu offerings, affordability, speed and hospitality. It has managed to carve a niche for itself in the market. This company is a buy.

Disclosure: I do not hold any position in the company.


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