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Restaurant Sales Increased 15.9% to $23.8 Million For Kona Grill

2011-10-27

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Kona Grill Double-digit same-store sales growth in the third quarter drove significant improvement to the bottom line

Kona Grill, Inc. (NASDAQ: KONA), an American grill and sushi bar, reported results for its third quarter ended September 30, 2011.

Third Quarter 2011 Highlights vs. Year-Ago Quarter:

Restaurant sales increased 15.9% to $23.8 million
Same-store sales up 10.6%
Restaurant operating profit margin increased 420 basis points to 18.3%
Income from continuing operations of $0.7 million or $0.08 per share, compared to a loss from continuing operations of $0.3 million or $(0.03) per share
Net income of $0.6 million or $0.06 per share, compared to a net loss of $0.4 million or $(0.05) per share

"Double-digit same-store sales growth in the third quarter drove significant improvement to our bottom line," said Michael Nahkunst, president and CEO of Kona Grill. "This was the eighth consecutive quarter of sequential improvement in our same-store sales, and the strong earnings firmly position us for profitability in 2011.

"During the quarter, we announced the closure of two underperforming restaurants in West Palm Beach, Florida and Sugar Land, Texas. This officially marked the conclusion of the pruning process related to our restaurant portfolio and will allow us to focus on developing two new locations targeted to open in 2012."

Third Quarter 2011 Financial Results

Restaurant sales increased 15.9% to $23.8 million, compared to $20.6 million in the year-ago quarter. The sales improvement reflects a 10.6% increase in same-store sales, driven by higher average guest check (including a menu price increase of approximately 3.3%), 2.5% growth in guest traffic, and additional revenue from the Baltimore, Maryland location that opened during the fourth quarter of 2010. The 10.6% increase in same-store sales compares to a 9.1% increase in the previous quarter and no change in the third quarter of 2010. Average weekly sales for all 23 restaurants were $79,800 in the third quarter of 2011, compared to $72,100 in the year-ago quarter.

Income from continuing operations was $0.7 million or $0.08 per share, a significant improvement from a net loss of $0.3 million or $(0.03) per share in the year-ago quarter. Net income for the third quarter of 2011 was $0.6 million or $0.06 per share, compared to a net loss of $0.4 million or $(0.05) per share in the year-ago quarter.

During the third quarter of 2011, the company closed its underperforming restaurants in West Palm Beach, Florida and Sugar Land, Texas, and has included historical operating results as well as lease termination and exit costs for these restaurants in discontinued operations. Loss from discontinued operations for the third quarter of 2011 was $0.1 million or $(0.02) per share.

Financial Guidance

For the fourth quarter of 2011, the company forecasts growth over the year-ago quarter, with restaurant sales of $21.5 million to $22.3 million, and a net loss of $0.1 million to net income of $0.2 million, or $(0.01) to $0.02 per share.


KONA GRILL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

		September 30,		December 31,
		2011		2010
		(Unaudited)

ASSETS
	Current assets	$	7,262	$	3,951
	Other assets		708		650
	Property and equipment, net		33,800		37,459
	Total assets	$	41,770	$	42,060

LIABILITIES AND STOCKHOLDERS' EQUITY
	Current liabilities	$	8,442	$	8,829
	Long-term obligations		14,160		16,242
	Stockholders' equity		19,168		16,989
	Total liabilities and stockholders' equity	$	41,770	$	42,060


KONA GRILL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

		Three Months Ended September 30,						Nine Months Ended September 30,
		2011			2010			2011			2010
		(Unaudited)						(Unaudited)

Restaurant sales		$	23,838		$	20,560			70,591		$	61,614
Costs and expenses:
	Cost of sales		6,372			5,623			19,251			16,430
	Labor		7,815			7,081			23,365			21,367
	Occupancy		1,742			1,634			5,125			4,888
	Restaurant operating expenses		3,538			3,315			10,627			9,565
	General and administrative		2,117			1,446			6,147			5,456
	Preopening expense		-			382			-			509
	Depreciation and amortization		1,474			1,371			4,419			4,138
Total costs and expenses			23,058			20,852			68,934			62,353
Income (loss) from operations			780			(292	)		1,657			(739	)
Nonoperating income (expense):
	Interest income and other, net		-			-			2			51
	Interest expense		(26	)		(4	)		(47	)		(119	)
Income (loss) from continuing operations before provision for income taxes			754			(296	)		1,612			(807	)
Provision for income taxes			19			-			44			10
Income (loss) from continuing operations			735			(296	)		1,568			(817	)
Loss from discontinued operations, net of tax			(146	)		(145	)		(288	)		(269	)
Net income (loss)		$	589		$	(441	)	$	1,280		$	(1,086	)

Net income (loss) per share - Basic and Diluted
	Income (loss) from continuing operations	$	0.08		$	(0.03	)	$	0.17		$	(0.09	)
	Loss from discontinued operations, net of tax		(0.02	)		(0.02	)		(0.03	)		(0.03	)
	Net income (loss)	$	0.06		$	(0.05	)	$	0.14		$	(0.12	)

Weighted average shares outstanding:
	Basic		9,256			9,168			9,224			9,163
	Diluted		9,454			9,168			9,398			9,163

Reconciliation of Restaurant Operating Profit to Income (Loss) from Operations

The Company defines restaurant operating profit to be restaurant sales minus cost of sales, labor, occupancy, and restaurant operating expenses. Restaurant operating profit does not include general and administrative expenses, depreciation and amortization, or preopening expenses. The Company believes restaurant operating profit is an important component of financial results because it is a widely used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance. The Company uses restaurant operating profit as a key metric to evaluate its restaurants' financial performance compared with its competitors. Restaurant operating profit is not a financial measurement determined in accordance with generally accepted accounting principles ("GAAP") and should not be considered in isolation or as an alternative to income (loss) from operations. Restaurant operating profit may not be comparable to the same or similarly titled measures computed by other companies. The table below sets forth the Company's calculation of restaurant operating profit and a reconciliation to income (loss) from operations, the most comparable GAAP measure (in thousands).


		Three Months Ended September 30,					Nine Months Ended September 30,
		2011		2010			2011		2010

Restaurant sales		$	23,838	$	20,560		$	70,591	$	61,614
Costs and expenses:
	Cost of sales		6,372		5,623			19,251		16,430
	Labor		7,815		7,081			23,365		21,367
	Occupancy		1,742		1,634			5,125		4,888
	Restaurant operating expenses		3,538		3,315			10,627		9,565
Restaurant operating profit			4,371		2,907			12,223		9,364
Deduct - other costs and expenses:
	General and administrative		2,117		1,446			6,147		5,456
	Preopening expense		-		382			-		509
	Depreciation and amortization		1,474		1,371			4,419		4,138
Income (loss) from operations		$	780	$	(292	)	$	1,657	$	(739	)


		Percentage of Restaurant Sales				Percentage of Restaurant Sales
		Three Months Ended September 30,				Nine Months Ended September 30,
		2011		2010		2011		2010

Restaurant sales		100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
	Cost of sales	26.7		27.3		27.3		26.7
	Labor	32.8		34.4		33.1		34.7
	Occupancy	7.3		7.9		7.3		7.9
	Restaurant operating expenses	14.8		16.1		15.1		15.5
Restaurant operating profit		18.3		14.1		17.3		15.2
Deduct - other costs and expenses:
	General and administrative	8.9		7.0		8.7		8.9
	Preopening expense	-		1.9		-		0.8
	Depreciation and amortization	6.2		6.7		6.3		6.7
Income (loss) from operations		3.3	%	(1.4)	%	2.3	%	(1.2)	%