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Wednesday, May 22, 2024
BusinessFood + Hospitality

Kona Grill’s Future Looks Bright as Growth Plans Take Shape

January marked a turning point in Kona Grill’s history. 

The chain opened a new store in Columbus, Ohio, which is its first restaurant debut since The One Group Hospitality purchased the brand in 2019 for $25 million. CEO Manny Hilario said it’s a “big step” in what’s expected to be a “large expansion” for the casual-dining brand. The location is earning $115,000 per week ($5.98 million in annualized AUV), pacing ahead of The One Group’s investment model. And that’s despite opening in January, typically the company’s slowest month of the year. The ONE Group didn’t report Q4 average weekly sales per store, but in Q3, Kona earned $5.4 million in annualized AUV on a trailing 12-month basis. 

For the remainder of 2023, there will be two to four more openings in Riverton, Utah; Phoenix; Henderson, Nevada; and Tigard, Oregon. Locations in Riverton and Phoenix are almost built, and Henderson is in progress. An opening in Lake Union, Washington, is in the future, as well. 

“We have all those sites in the process, and it’s just a matter of opening them,” Hilario said during the company’s Q4 and full-year earnings call. “So as we’ve discussed in the past, we are very sensitive to our neighborhood when we open these restaurants. So Riverton, we’re just waiting a couple of more weeks here to get to a place where I feel comfortable with the surrounding market and we will open that here. And then Desert Ridge [Phoenix] won’t be that much after that. … Our commitment’s three to five [per year] on Kona Grill. We did push two. We did push the openings into the beginning of this year. So we’re going to get through those relatively quick here at the beginning of the year and then we will start working on the remaining pipeline towards the end of 2023.”

Kona has 25 stores in the U.S. across almost 20 states. Long-term, The ONE Group believes there’s room for at least 200 domestic units.

The brand’s same-store sales dropped 7.6 percent and traffic was down in the mid-single digits in Q4 year-over-year, which The ONE Group attributed to lapping tough comparisons. For context, in Q4 2021, the chain’s comps lifted 38.2 percent. When comparing last year’s fourth quarter to Q4 2019, Kona’s same-store sales jumped 27.7 percent. 

“I would say that if I had to evaluate Kona Grill’s comp, we were, if not best, one of the best in class for casual in the fourth quarter last year,” Hilario said. ” … I would say we would be top of industry. And then this year, obviously, we’re going up against a tremendous amount of excitement from that in the prior year. And so it was just a very hard lap this year.”

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Hilario doesn’t expect new stores to put pressure on margins. In the fourth quarter, Kona earned $4.2 million in operating profit or 13.1 percent of net revenues. That’s up from $1.91 million and 6.4 percent in the third quarter. The latest fleet is also expected to be labor and margin friendly. For example, the sushi bar—a labor-intensive segment—is smaller in the new design.

“I think as the mix of the new design restaurants come into play, I think you will see the brand really coming to some very nice margins,” Hilario said. ” … That’s kind of the path that we now have for Kona Grill is continue working sales. And the volumes in the new stores should be additive to the AUV for the brand, and I think that the margin will improve for the brand.”

As for Kona’s sister company, STK, the steakhouse opened two U.S. company-owned restaurants in Dallas and San Francisco, both of which are pulling in $350,000 per week, or $18.2 million in annualized AUV. The performance is significantly above STK’s investment model of $154,000 per week. On average, The ONE Group expects to have less than one-year payback for these locations. 

STK’s comps were flat in Q4 versus 2021 but rose 62.6 percent against 2019. Operating profit was $11.7 million and represented 22.6 percent of restaurant net revenues. 

The next round of STK stores will come in Charlotte; Boston; Washington, D.C.; Aventura, Florida; and Philadelphia. Each will be corporately run and take hold in “A” real estate, Hilario said. Charlotte is “very close” to finishing, and Boston will come one to three months afterward. The others will come about a month to six weeks apart thereafter. STK has 25 restaurants in major metro cities in the U.S., Europe, and the Middle East.

The ONE Group said there’s whitespace for 200 STK stores globally, and recent openings prove the demand is there, Hilario said. 

“Give credit to the brand on those openings. So when we were coming out to opening those restaurants, I think people know the brand really well because we have grown quite a bit. So I think just the brand awareness and the way that we go about defining our geographies,” said Hilario, explaining the success of new stores. “Dallas is a very complementary, very great city for steak. And so we’re really picking some great cities in terms of development for STK. So I think [it’s] the combination of that—cities and geography and quality of real estate as well as the brand being there.”

“The last thing I would say on the success of the openings is our focus on marketing has always been digital,” he continued. “And we have, in my opinion, really become an incredible digital-marketed brand. So we are able to create, through social, a lot of excitement about these openings. So I think the combination of those things has really led to these great opening revenues.”

The ONE Group earned $88.3 million in revenue in Q4, up from $84.1 million in 2021. Cost of sales was 24 percent, down slightly from 25.9 percent in the prior year due to menu mix management and price increases, partially offset by commodity inflation. The company said it has more room for additional pricing if necessary. For the full year, revenues increased 14.2 percent to $316.6 million from $277.2 million.

read moreChain RestaurantsFinanceKona GrillSTK 

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