Kona Grill Inc. has pared back unit growth plans for the year and is negotiating with landlords to reduce rents at a number of restaurants, executives said Monday.
The Scottsdale, Ariz.-based grill and sushi bar chain, which widened its loss in the first quarter ended March 31, reduced planned openings this year from three locations to one. CEO Berke Bakay said rents at underperforming restaurants, perhaps as many as five, were in “tough negotiations.”
“Any restaurant that is in our portfolio that is losing cash flow, I am in various stage discussions with landlords in terms of either exiting those locations or getting significant rent reductions to be able to get us to kind of see the light at the end of the tunnel,” Bakay told analysts after releasing earnings.
Christi Hing, Kona Grill’s chief financial officer, said the one remaining domestic opening would be in Scottsdale next month.
Kona Grill will identify cost-savings opportunities to reduce costs by $3 million annually, Bakay said, with reductions in one salaried manager position at lower volume restaurants and the elimination of a second sous chef position at training restaurants.
Bakay said the retail and restaurant landscapes were challenging. Many of Kona Grill’s restaurants are located in shopping malls, especially the enclosed properties.
“If you look at the industry data in Q4, you are going to see double-digit traffic declines in enclosed malls,” he said.
“As much as we're in some of the best malls in the country, they are still not immune because more and more dollars have been pushed to the online sales environment,” Bakay said. “It's a double-whammy, unfortunately, because retailers can't make it. So they go bankrupt and the spaces that become available are also given to more new restaurants.”
Given those pressures, Kona Grill revised its 2017 forecast. The company projects restaurant sales to be $190 million, down from $200 million in earlier guidance.
Kona Grill is looking to develop franchised units outside the United States, Bakay said, including an agreement signed in April with ZZen Design Build Limited for restaurants in Toronto. The operator expects to open outlets in the United Arab Emirates and Mexico this year.
In the first quarter, Kona Grill’s loss widened to $3.4 million, or 33 cents per share, from a loss of $1.7 million the previous year. Restaurant sales rose 15.1 percent, to $45.2 million, from $39.3 million in the same quarter last year. Same-store sales declined 4.3 percent.
Kona Grill owns and operates 45 restaurants in 23 states and Puerto Rico.
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