Commodities increased 210 basis points to 26.1 percent in Q3, up from 24 percent in the year-ago period, driven primarily by beef and shellfish costs. However, COGS only rose 0.8 percentage points compared to Q2, a sign that restaurants have done well with managing inflation, Hilario said.
To do this, the ONE Group has looked for substitutes that have better costs, like switching out red king crab for Dungeness crab. The company is also focusing on promotions and beverages that present more profitable opportunities.
Despite headwinds from commodities and labor, The ONE Group used sales growth to achieve a 17.1 percent restaurant margin and reach more than $10 million in adjusted EBITDA, bringing the year-to-date total to $29.4 million.
“We continue to work with our vendors and supply chain in order to control costs and continue to manage and engineer our product mix towards higher-margin items,” CFO Tyler Loy said.
Looking ahead, The ONE Group still expects to open 13 new STK and food and beverage hospitality venues (hotels and casinos) between 2021 and 2022. Seven have already debuted, including a company-owned STK restaurant in Bellevue, Washington, that’s earning $240,000 per week. Currently, three more STK locations are under construction in Dallas, San Francisco, and London; each should open in late 2021 or early 2022.
To spread its brand where it doesn’t already have a presence, The ONE Group entered an agreement with REEF Kitchens to debut ghost kitchens in the Houston market.
“Although REEF would like to have done a whole U.S.-sized deal, we decided—as we do with everything—we want to test it and see if it works or not,” Hilario said. “I also want to have a good understanding of what the brand acceptance is when we take an STK and Kona Grill to a place where really there's not a street store.”
For Kona, The ONE Group is targeting three to five new restaurants per year starting in 2022. Hilario said the company continues to see high demand from landlords, considering the chain’s $5 million AUV and store-level margins that produce more than 40 percent cash-on-cash returns. The first new Kona store to open since The ONE Group bought the brand for $25 million in 2019 will come in Riverton, Utah, by May 2022.
There are 23 STK locations across the U.S., Europe, and the Middle East, and 24 Kona restaurants domestically.
“Frankly, we are early in our growth strategy and lots of white space remains,” Hilario said. “Over the long-term, we foresee a total addressable market of at least 200 STK restaurants globally and at least 200 Kona Grills domestically. Combined, that's over 400 restaurants. Much of this growth will be asset light and our company-owned restaurants will be self-funded through internally generated cash.”