The ONE Group Hospitality CEO Manny Hilario said the performance, which has been sustained over several weeks, doubled what the company expected.
The ONE Group Hospitality has long held the belief that STK Steakhouse has room for 200 restaurants across the world.
Proof of that demand can be found at the chain's recent opening in downtown San Francisco, which is earning more than $350,000 per week in sales, or a stunning $18.2 million in annualized AUV. CEO Manny Hilario said the run rate has been sustained for several weeks and that it is double what the company expected.
"The restaurant has been incredibly well-received in city, and the city has been dormant since COVID," Hilario told investors during The ONE Group's Q3 earnings call. "So, not a lot of activity in that city. There was not a lot of restaurants that had opened or anything really significant there. So, the city has really embraced the restaurant, and we are very happy with that. In terms of what that means for margin is that San Francisco does have a higher minimum wage in the city. So, we do have to put up more dollars for labor. But I think at those kind of volumes, our STK margins are significantly higher, probably the 20 percent to 25 percent higher range, if not even higher than that. So, I would expect San Francisco to have a very healthy margin at the volumes that they are running right now."
In the quarter overall, STK's same-store sales grew 3.5 percent year-over-year in the third quarter and 7.6 percent on a three-year basis. U.S. average weekly sales per store came in at $290,000, which is $15.1 million in annualized AUV. It's a step down from Q1 ($311,000) and Q2 ($331,000), but not surprising as Q3 is historically a slower quarter for the brand. On a trailing 12-month basis, STK's AUV is at $16.5 million.
STK's sister chain, Kona Grill, saw comps fall 3.6 percent year-over-year, but grew 22.3 percent against 2019. Hilario said the decrease was mostly due to lapping a 26.9 percent increase in the year-ago period. Kona's average weekly sales were $95,000, or $4.94 million in annualized AUV. On a trailing 12-month basis, AUV is $5.4 million. The CEO noted that in addition to Q3 being historically a lower-performing period, STK and Kona's comps were materially impacted by Hurricane Ian, with 14 percent of the sales base residing in Florida.
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The restaurants implemented multiple promotions in Q3 to drive buzz, including wagyu specials for National Steakhouse Month, along with celebrations of National Tequila Day, National Mac & Cheese Day, and National Cheeseburger Day. Then, on Labor Day, the brand offered 50 percent off to frontline workers, which was successful and well-received by local communities, Hilario said. In addition to these marketing strategies, STK and Kona are both continuing to preach value, like STK's $3/$6/$9 Happy Hour menu. This particular offering not only improves traffic during shoulder periods, but it exposes new customers to approachable price points and brings them back for more special occasions. There's also the growing brunch daypart, Kona Grill’s $19 Power Lunch on weekdays, STK’s Pre-Theater prix fixe menu, date night offerings, and takeout/delivery menus.
The most significant news, however, is that event business is coming back after a two-year pause. Bookings are building ahead of what should be a high-volume holiday season.
"So the suits are definitely back," Hilario said. "So if you’re going to our restaurants, in urban centers, you’re definitely seeing a lot more business dine, and we’re also seeing a significant increase and demand for corporate events. So I would say that business is definitely back. But obviously, as I look around, there is still a tremendous amount of vacancy in the city. So I look at that as an upside opportunity. So the business has rebounded there, and I can actually see an uptick. We’re also seeing an increase in convention. So convention cities like Denver, Orlando, Vegas, we’re starting to see a lot of activity on conventions, particularly that small to mid-sized convention business is definitely back. So we’re definitely seeing an uptick on that business."
In terms of labor expenses, Hilario said wage rates are stabilizing. As for commodities, restaurants are seeing favorability with seafood, but no immediate relief on beef costs. In the face of double-digit rises in expenses, STK and Kona decided to price below inflation in the quarter in exchange for grabbing market share. STK took a 2 percent increase, and Kona implemented a 5 percent hike. Neither chain saw consumer resistance, and The ONE Group feels confident about taking more price in the fourth quarter as customers come celebrate the holidays.
Because of the conservative pricing approach, Q3 operating profit margin was 18.5 percent, down from 22.6 percent a year ago. It's also important to note the third quarter is typically a lower-margin period because STK and Kona make heavier investments to be fully staffed for the busier fourth quarter. In the long-term, STK still expects operating profit to be 20-25 percent and Kona is still projecting 15-20 percent.
Hilario said additional pricing, along with the quality of new restaurants, will improve margin profile going forward.
"Those restaurants are what we consider to be the more margin-friendly restaurants with smaller sushi bar placements and stuff like that," the CEO said. "So, those restaurants, we actually expect them to be more margin efficient than the current portfolio of restaurants. So we are actually looking forward to the positive impact of the new class of Kona Grill to the Kona Grill margin profile because they are actually more efficient restaurants the way that we have designed and we plan to operate them. I am pretty bullish on the margin profile for the restaurants into the ‘23 year and the fourth quarter ‘22."
For the rest of 2022 and into Q1 2023, development looks like this: managed STK in Stratford, London; Kona Grill in Riverton, Utah; Columbus, Ohio; and Desert Ridge, Arizona; and two ghost kitchen units in partnership with REEF Kitchens in Texas. At the end of the quarter, STK had 24 restaurants across the U.S., Europe, and the Middle East. Kona had 24 units in the U.S.