Three years ago, around this time, Kona Grill was unraveling.
In April 2019, the casual-dining chain revealed it was on the verge of bankruptcy. It retained Piper Jaffray as a financial adviser to explore strategic alternatives. Leadership was in disarray, as well; in less than a year, four different executives took on the role of CEO.
Indeed, Kona Grill filed bankruptcy the next month and had its stock listing suspended after trading for 14 cents per share. The chain had 46 restaurants in 2017, but its footprint whittled to 27 over two years.
Later that fall, The ONE Group Hospitality swooped in and purchased the brand for $25 million, initiating a turnaround that’s lost little traction throughout the pandemic.
Kona’s same-store sales increased 21.9 percent in Q1 compared to last year, and grew 27.5 percent against 2019. The chain earned $101,000 in average weekly sales per restaurant, equating to $5.3 million annualized AUV. That’s up from $79,000 in 2019, or $4.1 million in annualized AUV.
The brand is carrying pricing of more than 5 percent, but CEO Manny Hilario said most of the growth is coming from increased traffic, thanks to the incremental brunch daypart and happy hour offerings. Kona tracks guest feedback, and there’s been little commentary on pricing, leading Hilario to believe customers are not trading down.
“At Kona Grill our emphasis has been experiential,” Hilario said during The ONE Group’s Q1 earnings call. “So we have not seen any impact even as gas prices have tremendously increased in some of these markets. So we definitely are very aware of that. But again, I also remember that our emphasis on growth has been the value layer. So we have put a lot of emphasis on brunch as well as returning to happy hour. So we’ve seen a lot of success on those dayparts. So to a certain degree, I would say that any difference in check has been driven by our emphasis on strategy.”
Kona’s sister concept, STK Steakhouse, is performing at an even higher level. The brand’s comps rose 66.5 percent versus 2021 and 62.9 percent against 2019. And it’s not as if STK is rolling over bad performances. Same-store sales rose 8.6 percent and 20.8 percent in Q1 2019 and Q1 2021, respectively.
STK earned $311,000 in average weekly sales per unit in the first quarter, equating to a $16.1 million annualized AUV. That’s a big bump from 2019, when it saw $212,000, or $11 million in annualized AUV.
Kona’s off-premises channel mixes 13 percent and STK’s accounts for 5 percent of sales, and both brands are building catering capabilities as offices reopen and larger gatherings resume. Restaurants are also seeing more reservations for private dining, a channel that’s been missing for the past two years.
“The sales momentum proves the interest in dining at our highly differentiated upscale and polished casual restaurants remain strong even in an uncertain environment,” Hilario said. “Our focus on strong operational execution, innovative culinary offerings, and big dining continues to resonate with our guests as we provide exceptional and unforgettable dining experiences with opportunities for guests to enjoy themselves.”
The sales have set up Kona and STK for future success, with a development pipeline that’s stronger than any other point in company history. In 2022, there are nine openings planned, including two company-owned STK stores in Dallas and San Francisco; a managed STK in London; three corporate Kona units in Riverton, Utah; Columbus, Ohio; and Paradise Valley, Arizona; and three licensed ghost kitchens in partnership with REEF Kitchens.
The ONE Group seeks 40-50 percent ROI for new restaurants. The addressable market is at least 400 outlets, including 200 STK locations globally and at least 200 Kona stores in the U.S. At the end of Q1, STK had 22 restaurants and Kona had 24.
Hilario described the current development environment as “more dynamic,” with the company stretching its lead times on equipment from six months to nine to 12 months. However, it’s nothing that’s significantly impacted the timing of openings.
“In the past, you could go to equipment distributors and pick up four, five pieces relatively quick,” the CEO said. “Now there’s things such as not enough chips, so you get a lot of people pushing back on equipment. We have to be flexible on some specs relative to kitchen equipment. But again, it’s all about project management and being sure that you get ahead of the planning.”
As for real estate, Hilario has seen great availability in malls housed in big markets. Because of all the closures, the executive said there’s flexibility in choosing the best pieces of land. It’s one of the better real estate markets he’s seen, and The ONE Group is receiving “fantastic deals” from landlords as a result.
“But again, I think that’s just a testimony to the success of the brand, so people like to get STKs and Kona Grills and want to get them in their projects because of the average volume and the fact that we have exciting programs like our happy hour programs and our brunch program,” Hilario said. “So I would say that I’m very excited about the go-forward development plans with the only caveat is that we have to be more proactive. And we have to have more lead time and adjust our project time lines for that.”
Companywide, revenues increased 46.9 percent to $74.2 million, exceeding the high end of previous guidance by $4 million. Restaurant operating profit grew 40.8 percent year-over-year to $13 million, and adjusted EBITDA lifted 65.5 percent to $10.8 million.