There is no shortage of changes taking place at Kona Grill. The latest is the promotion of Jim Kuhn to president and chief executive officer, a move the company announced August 9 along with its second-quarter results. He succeeds Berke Bakay, who has led the brand the past six years and is shifting to an executive chairman role.
Kuhn joined the 46-unit chain as chief operating officer in late 2017. He previously oversaw the Genghis Grill brand as chief executive of Chalak Mitra Group.
Kuhn is grabbing the reins during a transformation period, to say the least. Kona Grill’s same store sales dropped 12.1 percent in Q2. On top of the prior-year period’s 5.3 percent decline, Kona Grill is looking at comps drops of more than 17 percent on a two-year stack. Revenues fell 9.8 percent to $42.3 million and the company posted a net loss of $1 million in the quarter.
However, Kuhn said the brand’s profitability “significantly improved” compared to the prior-year quarter thanks to cost savings initiatives implemented earlier in the year. For the first half of fiscal 2018, Kona Grill has more than doubled last year’s numbers by generating $4.5 million in adjusted EBITDA (compared to $2.2 million in the first six months of 2017 and $4.8 million for all of 2017).
“In order to achieve higher profits, we strategically made adjustments to reduce the amount of promotions within our restaurants,” Kuhn said in a conference call. “We adjusted days and hours of happy hour times for each restaurant to maximize impact while also balancing profitability with guest appeal. We also evaluated the closing times of each of our restaurants and adjusted hours to align with sales and productivity targets. With the cost savings initiatives in place and sustained and they are sustainable for the future, we are focused on execution and building sales for the long-term.”
Kuhn added that Kona Grill expects to see comps grow as the brand laps these changes in 2019.
The biggest driver of margin improvement in the quarter was cost of goods sold. Cost of sales decreased 240 basis points to 25.3 percent compared to 27.7 percent, as Kona Grill continues “to see cost savings from our efforts to simplify recipes and streamline processes within our kitchens to provide better consistency and execution of our menu,” chief financial officer Christi Hing said in the call.
Labor cost as a percentage of sales decreased 100 basis points to 35.4, “attributable to our continued focus on labor,” Hing added. “… We evaluated how we do things in the kitchen to identify opportunities to streamline our operations, and therefore, save time and money.”
Closures of underperforming locations are part of the process. Kona Grill shuttered a unit in July and is “evaluating alternatives for the others,” in regards to low-performers. “During the quarter, we entered into a lease termination agreement for two leases that we ultimately decided not to pursue, and therefore, now we have no lease obligations for future restaurants. We believe this was the prudent thing to do and provides us with flexibility in allocating our capital,” Kuhn said.
As Kona Grill mentioned last quarter, the brand intends to pursue domestic franchising as part of its future growth plans.
On the store level, Kona Grill isn’t sitting pat. It unveiled a massive menu overhaul June 27 that introduced more than 25 new items and handcrafted cocktails. It also included a beverage book to feature and showoff the selections. Kona Grill’s new menu items include a variety of flavorful starters, hand-tossed salads, fresh premium sushi rolls, oven-fired flat bread, handcrafted sandwiches, and entrees. Read here to see the new items.
Kona Grill recently upgraded its email club to a loyalty program, which added a points-based program to drive frequency, Kuhn said. A mobile app is coming to complement the platform. Late in July, the company implemented various marketing efforts with a new PR firm, and added targeted email and mobile marketing. Additionally, a new website is scheduled to roll out next week.
“The updated website features a more contemporary design to align with the uniqueness of our global menu, has all our updated graphics, and increased functionality will make it easier to navigate and use on a variety of devices,” Kuhn said.
“These initiatives are framed around our mission to make every experience exceptional for our guest,” he added later. “We’re focused on elevating all aspects of operations through great service and hospitality and an appealing environment.”