Kona Grill looks ahead after top-level turnover

Executives confident on future of casual-dining chain

Kona Grill executives assured analysts Thursday that they intend to bring the past year’s chief executive carousel to a standstill.

Current chief executive and president Berke Bakay, who was appointed in January [3], said the morale at the Scottsdale, Ariz.-based company remained positive, despite the CEO changes of the past year.

“It's true that there's been a lot of turnover, but I think if you were to poll the board members one by one, they're very confident that we're moving in the right direction,” Kona Grill chairman Jim Jundt told analysts in call after the company released fourth-quarter 2011 earnings.

Marc A. Buehler was let go as CEO [4] in June to be replaced permanently by board member Michael A. Nahkunst [5] in October, who himself was let go to make way for Bakay in January. Bakay is the investment manager to BBS Capital Fund and Kona Grill’s largest shareholder.

Kona Grill, the parent to the 23-unit grill and sushi restaurant chain, swung to a profit in its fourth quarter, booking net income after special charges of $747,000, or 8 cents a share, for quarter ended Dec. 31. In the same quarter a year earlier, Kona booked a net loss of $491,000, or 5 cents a share.

Latest-quarter revenue rose 9.2 percent to $23.1 million.

The company said same-store sales increased 7.8 percent, driven by higher average guest check and 3-percent growth in guest traffic.

In regards to top-level turnover, “The restaurant business is a very hands-on business, and Kona Grill has a lot of great people at the operating level, and we think that Berke will do a great job of empowering these people to continue the good work they've done in the last couple of years,” Jundt said.

Bakay added, “I've been coming to these headquarters for five years now. I would characterize the mood and morale to be extremely positive.”

Jundt hinted that locations of prior executives may have posed problems.

“As you are aware, there is a situation where top management hasn't resided in Phoenix in the past, and there are very few corporations that are operated with management living in one major city a thousand miles away from the headquarters,” he said. “So we're very confident that Berke has probably spent more time here in the last two weeks than part of our management spent in a month.”

Jundt added that Bakay is expected to stay. “As a substantial investor myself, my money is on Berke’s being here 18, 24 and 36 months from now,” he said.

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Kona Grill executives also discussed in the call:

Take-out improvements: The company began a test in some restaurants in the fourth quarter to improve the take-out program, chief operating officer Larry Ryback said. The test includes an improved information technology component, packaging quality and internal training. “We feel that this initiative has significant upside potential, as our take-out sales are below many of those in our peer group,” Ryback said.

Development pipeline: The company has no immediate public plans for additional units after closing several last year in what Bakay characterized as real estate mistakes. “We will take time necessary to build a strong pipeline so that we have the choice of taking our selected size from a breadth of options rather than choosing B sites,” he said. “Some of our past decisions happened closely, as the three restaurants that have been closed to date cost us more than $10 million to build, opening and closing costs. For a company of our size, we cannot afford to repeat our past mistakes.”

Future growth: The hiring of Marci Rude as vice president of development [6] will help Kona Grill’s growth strategy, Bakay said. Rude’s “extensive business development experience, particularly the vital role she served at P.F. Chang's critical phase of expansion, will play a key role as we execute our growth strategy,” he said.

Food costs: The company expects increases in beef costs, but favorable price on seafood. “I think it's also worth noting that because roughly 25 percent of our sales come from sushi and 30 percent come from beverage, that beef is not as big a part of our business as it is to other concepts in our segment,” Ryback said.

Same-store sales guidance: Kona expects first-quarter same-store sales to increase 4 percent, said Christi Hing, vice president of finance and controller.

Credit agreement: Kona has entered into a $5.5 million credit agreement with Stearns Bank National Association. The company said it plans to use the proceeds from the line of credit to fund restaurant construction and remodeling.

Please contact Ron Ruggless at [email protected] [7].
Follow him on Twitter: @RonRuggless [8]