Kona Grill experienced negative same-store sales in the first quarter, but it’s hard for The ONE Group Hospitality CEO Manny Hilario to be critical.
The casual-dining chain rebounded quickly from early pandemic restrictions, and now the chain is competing against those high-performing results. For instance, Kona’s comps dropped 4.3 percent in Q1 year-over-year, but it lapped 21.9 percent growth in 2022 and a 26.6 percent lift in 2021. AUV is in the $5.2 million range, up from $4 million in about a year and a half. The ONE Group purchased Kona in 2019 for $25 million, a few months before the pandemic began.
“If you take the COVID period out, we’ve only really operated that brand in about 18 months of really more normalized operations,” Hilario said during the company’s Q1 earnings call. “So I would say moving AUVs over 30 percent on 18 months of operations signifies that we have a pretty good handle on managing the revenue base.”
The ONE Group began 2023 with the opening of a redesigned Kona in Columbus, Ohio—the chain’s first opening since it was acquired. In the first quarter, the restaurant performed above the system average and beyond its investment model. The store achieved this without having the patio open, which adds 40-50 seats. Hilario said this outdoor seating will allow Kona to take advantage of mall traffic on Fridays and Saturdays. The CEO also emphasized the unit’s efficiency. The sushi bar can be manned by one person most of the time, leading to a significant impact on labor costs and margins.
Kona’s operating profit was 8.1 percent for the quarter, down from 13.1 percent in Q4. However, it’s important to note that the first quarter is typically a seasonally low revenue period.
Hilario said there’s an internal team focused on initiatives related to mitigating operating expenses, like paper supplies, contracts, and labor productivity. In addition, the company wants to apply learnings from the Columbus store back into legacy locations. The CEO believes the combination of these elements will lead to higher margins for the rest of 2023. He adds that Kona is capable of a 17-20 percent margin profile.
“All-in-all, I feel pretty good about the progress, and I’m specifically excited about the possibilities with the new model that we just developed in Columbus,” Hilario said.
For the remainder of 2023, the company plan to open two to four additional Kona units in Riverton, Utah; Desert Ridge, Arizona; Henderson, Nevada; and Tigard, Oregon. The ONE Group estimates there’s room for 200 Kona restaurants in the U.S.; currently there are 25.
“I think, over time with the addition of those units, I think that we still believe that Kona Grill is one of the most attractive economic models in casual with high volumes greater than $5.5 million, $6 million, and 17 percent plus type of margins. But again, I think 2023 will be the year of really rebuilding that back up, lapping through the labor.”
Meanwhile, Kona’s sister concept, STK Steakhouse, saw comps lift 5.3 percent in Q1, lapping 66.7 percent growth in 2022 and 20.8 percent in 2021. Restaurant margins were 22.1 percent. The chain opened a rooftop location in Scottsdale, Arizona, in February—the fourth such restaurant in the portfolio. For the rest of 2023, three to five new company-owned STKs are expected in the following cities: Charlotte, North Carolina; Boston, Washington, D.C.; Aventura, Florida; and Salt Lake City. The ONE Group also plans to debut one managed or licensed unit. The company wants 200 STK locations globally. The latest venues are outperforming The ONE Group’s investment model and should have less than a one-year payback.
In terms of how customers are using both brands, STK recently launched a new Wagyu promotion and ran out of the product in most locations, proving to Hilario that guests still have a “tremendous appetite” for premium products. The chain also saw positive movement from business-related traffic and a good response from its $3/$6/$9 Happy Hour menu. At Kona, there’s been a shift to lighter fare, such as changes from main entrées to sandwiches.
Overall, both concepts see most of the impact based on the day of the week.
“I think the weekday business is softer, particularly on the suburban markets,” Hilario said. “And then the weekend business is super robust. So I would say Friday and Saturday. I think that we’re seeing very positive trends. As a matter of fact, our number one initiative right now on the weekend is to really take advantage of the 6:30 to 8:30 [p.m.] traffic, which is significant. So we like that, but we certainly have seen a little bit of a different pattern on the weekdays, but it seems like the weekend becomes the makeup for those levels of patterns.”
Cost of sales decreased 170 basis points to 24 percent in Q1, compared to 25.7 percent in the prior year, primarily due to menu mix management, pricing, and operational cost reduction initiatives. Operating expenses increased to 59.6 percent because of consolidated average wage increases and inflation, partially offset by single-digit pricing taken in the back half of 2022. Restaurant operating profit decreased 210 basis points to 16.4 percent versus 18.5 percent last year.
CFO Tyler Loy said operating expenses should normalize as The ONE Group laps wage and cost inflation from last year.
Total revenues were $82.6 million, increasing 11.3 percent from $74.2 million for the same quarter last year. Adjusted EBITDA was $10.9 million compared to $10.8 million in 2022.