This Restaurant Chain Is Just Now Entering Growth Mode

Don't you wish you could go back in time and invest in The Cheesecake Factory and Buffalo Wild Wings before they entered growth mode? What about Dunkin' Brands Group (NASDAQ: DNKN  ) or BJ's Restaurants (NASDAQ: BJRI  ) ? Now, you may get another chance with a little unknown chain named Kona Grill (NASDAQ: KONA  ) .

Whether you're in the mood for something from the sushi bar, a hearty steak, or a fancy sandwich, Kona Grill has the ultimate American/Asian/Hawaiian fusion mix to satisfy just about anyone. With just 24 locations, chances are you've never heard of it. With its healthy 18% to 19% operating profit margin, (excellent for a restaurant), now may be a good time to follow Kona Grill, while it's still young.

Kona Grill reported its third-quarter results on Oct. 30. Revenue increased 2.6% to $24.5 million. Same-store sales also increased 2.6%, which was due to a mix of increased guest traffic and increased spending per guest. Net income was $660,000 or $0.08 per share. It was the 12th positive same-store-sales increase out of the last 13 quarters.

CEO Berke Bakay stated, "Momentum for Kona Grill remains strong as we continue the process of transitioning back into a growth company." The company opened its first new restaurant in three years and expects to open another before the year ends. It has at least four new restaurants planned for 2014, and already signed leases for two more in 2015. Management is expecting sales to double within five years.

Bakay pointed out that the industry saw a 2.5% same-store-sales decline in the quarter compared to Kona Grill's 2.6% rise. He went on to say, "We're very excited to return to growth mode with the grand opening of our Boise restaurant that took place a little over a week ago." Kona Grill remained focused on building a menu, an image, and an operating efficiency that works. Now it's ready to let loose. The goal of most restaurant chains is to come up with a concept that works -- then rapidly clone itself.

Others restaurant chains seeing double
Thinking about Kona Grill's target of double sales, one could be quickly reminded of two other chains with the same goal.

BJ's Restaurants (NASDAQ: BJRI  ) is much bigger than Kona Grill, but it is still small as far as chains go. The beer and Chicago-style pizza chain has 143 restaurants in 15 states. That leaves plenty of untapped potential available for BJ's Restaurants. BJ's Restaurants expects to double the number of restaurants in five years to 286 or more. On a side note, if Kona Grill merely catches up with BJ's Restaurants location count now, it would be a huge percentage gain. 

Dunkin' Brands (NASDAQ: DNKN  ) has thousands of locations around the country and thousands more around the world. For those of us who grew up with Dunkin' Donuts, it already seems like there is one on every street corner. Would you believe it is only now beginning to tap into California? In fact, there are over a dozen states Dunkin' Brands has yet to enter but is targeting. Currently, Dunkin' Brands has over 7,500 locations in the U.S. and it plans to double in size to around 15,000 restaurants.

Foolish final thoughts
It's always enticing to consider a restaurant investment that has its eye on doubling sales or locations. Not all doublings are considered equal, however. There is a world of difference between doubling 24 locations and doubling 7,500. Sure, they are equal percentage wise, but then what?

If Kona Grill doubles to 48 locations, it still may be in its infancy or very early in its long-term growth curve. Kona Grill deserves a closer look by Foolish investors looking for the next great restaurant growth name. 

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 05, 2013, at 3:05 PM, boardwalk97 wrote:

    What is the normal same store sale for restaurant i.e OUTBACK VS KONA?

  • Report this Comment On February 16, 2014, at 2:50 AM, CountDaBean wrote:

    I bought into Kona @ 7.74 a share. I took a small position with only 1,000 shares. I am considering to take a second purchase around 500 shares. But I would like to see a 15.00 buy in price.

Add your comment.

DocumentId: 2751605, ~/Articles/ArticleHandler.aspx, 4/17/2014 12:26:43 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...