The ONE Group Hospitality CEO Manny Hilario told investors earlier this month that STK Steakhouse and Kona Grill are now positioned to “open restaurants in the cadence that meets the needs of the business.”
What does that look like?
In October, the company opened an STK in Charlotte, North Carolina, (a new market) and a Kona in Phoenix (the third store in the trade area). Hilario noted that both are off to strong starts and that they “bolster our belief in the long-term EBITDA and earnings power of our development pipeline as we demonstrate industry-leading ROIs for our shareholders.” Two more STKs are planned for Q4 and another three should open toward the beginning of next year.
In total, The ONE Group expects to open eight locations in 2023. That would double what the brand did last year. Of these eight stores, three are STKs, three are Konas, and another two come under virtual brand Bao Yum in a licensing agreement with REEF Kitchens.
“We’re still super excited about the quality of the pipeline,” Hilario said during the company’s Q3 earnings call. “But one of the things you’ll hear us talk a lot more about is just flexibility and the opportunity to pace the openings at the pace that feels comfortable and right for us. Because obviously, you always have to balance the financial resources and the human resources when you’re going through your growth. So it’s really just us keeping pace and making sure that we’re balancing those two factors.”
Hilario noted that the next handful of restaurants will be STKs. But that isn’t an indictment of how the company feels about Kona.
“As a matter of fact, our Desert Ridge Kona Grill, which we just very recently opened has already jumped up to the top in revenue in the chain or in the group,” Hilario said. “So we’re super excited about that. And I think that really speaks to the quality of the real estate that we’ve gotten into the pipeline in the last couple of years.”
STK stores average about 10,000 square feet. In 2022, the U.S. AUV and average check per person for units opened at least 18 months were $19.1 million and $131, respectively. The ONE Group typically targets $3.8 million in average cash investment for when it builds from a shell state. If it’s second-generation, the price tag comes down to $2 million to $3 million.
Kona locations are around 8,000 square feet. Last year, the AUV was $5.3 million and average spend per transaction was $61. To open a Kona, the company uses approximately $2.5 million in cash investments. This total may change as The ONE Group is currently testing various prototypes with different layouts, equipment packages, and features, like rooftops and mezzanines. This may make buildout costs higher than historical norms.
“I think just in general the construction environment—that as many people have reported—is more complex,” Hilario said. “I think our strategy has been to put as many projects in process, kind of priming the pump with a number of projects. I think we’ve been doing that now for the last 12, 14 months—really lining up the amount of projects in the pipeline. And I think now we’re at the point where we have plenty of alternatives within the pipeline that it’s more about us picking and choosing which projects we want to bring on. And it’s really about prioritizing which one we want to bring on.”
Over the long term, The ONE Group views its addressable market as 200 STK restaurants globally and 200 Kona Grills domestically with ROIs between 40 percent and 50 percent.
Getting there won’t be without its challenges. The company is still seeing issues with permitting and construction costs.
“Construction is expensive,” Hilario said. “Labor is a primary input into the restaurants that we built. So in the last 24 months, we certainly have seen the cost of labor within the construction builds going up. So it’s certainly something that we keep monitoring very well. And obviously, the way to get through labor and construction projects is to shorten the construction cycle so that you get in, get out of building the site, so you don’t stretch out the labor within the construction cycle.”
STK’s same-store sales dropped 5.5 percent in Q3, while Kona’s increased 1.1 percent. Both concepts noticed trade down on the menu throughout the quarter. Compared to 2019, STK’s comps jumped 61 percent, comprised of a 40 percent bump in traffic and a 21 percent lift in average check. Kona’s same-store sales rose 23.7 percent versus four years ago. The restaurants will continue to leverage their value proposition to attract customers. Each has a $3, $6, and $9 Happy Hour program. There’s also a Night Out menu, featuring wine or bubbles, an appetizer, an entree, sides, and dessert for $69 per person at STK. A similar offer is $39 per person at Kona.
Restaurant-level operating margin was 12.3 percent in Q3, down from 13.1 percent in the year-ago period. In dollars, restaurant operating profit was flat year-over-year. The ONE Group felt margin pressure in the third quarter because of continued investment in labor for new restaurant openings. Hilario said that because STK and Kona Grill have some of the highest AUVs in the industry, the company prefers to open them with experienced management and staff who have experience working at volume. The ONE Group expects this labor cost impact to lessen in the fourth quarter.
The fourth quarter is usually The ONE Group’s highest revenue and adjusted EBITDA quarter and one where it generates significant cash. The company plans to build this cash flow and keep the necessary liquidity to fund future development plans. All signs indicate the chain will have “really powerful” private event bookings for the upcoming holidays.
“As always, the challenge is that we do have limited space in some of our restaurants,” Hilario said. “So it’s always about how you manage the capacity during those four or five weeks in December that really make it happen. So it’s really about that, but the early demand is strong, and we still haven’t done our full promoting on it yet. So there will be some promotions and marketing that we’ll be doing in the next couple of weeks, that should even further that.”
The ONE Group plans to take, about 3 percent to 4 percent pricing in each brand ahead of the holidays to offset persistent inflation.