Kona Grill Inc. Might Just Be a Baby BJ's Restaurants, Inc. About to Grow Up

Source: Kona Grill

Really good and fresh sushi is one of my favorite tasty treats despite often feeling still hungry yet broke afterward. It's hard to find a place that makes really good sushi as an appetizer followed by an upscale- restaurant-quality steak, entree, or sandwich. This is where Kona Grill (NASDAQ: KONA  ) comes in. 

What does this have to do with BJ's?
BJ's Restaurants (NASDAQ: BJRI  ) is five to six times bigger than Kona Grill in terms of both restaurant count and market cap. BJ's Restaurants is a combination of a brew house and a slightly upscale casual-dining restaurant that serves American grill food and a number of other nationality items. It attracts a large bar crowd with many locations being packed into the wee hours of the morning.

Obviously BJ's Restaurants sells a lot of alcohol. Its menu is well diverse and aims to please everybody. It seems to have the same goal as Kona Grill in that regard -- something for everyone gets them in the door. Then sell them booze. Believe it or not, liquor as a percentage of sales is much higher at 30% for Kona Grill than it is at BJ's Restaurants, where it's only 22%.

And it seems to be paying off.

Source: Kona Grill

The BJ's-stomping results
On April 30, Kona Grill reported fiscal first-quarter results. Revenue jumped 17.5% to $27.6 million. Same-store sales popped 6.2%. It was the 14th out of the last 15 quarters of positive same-store sales growth. Net income per share ticked up 8% to $0.13 excluding temporary charges. Kona Grill is targeting five new openings this year, or an increase of 19%, to 31.

For comparison, BJ's Restaurants is planning to open 11 new locations this year, bringing the total up 7.5% to 158. Kona Grill, however, may have more of a reason to grow its units faster as a percentage. Last quarter, BJ's Restaurants seemed to be going in the opposite direction of Kona Grill on average on a per-restaurant basis. While BJ's Restaurants saw revenue rise 9.1%, same-store sales took a downward hit by 2.9%, and adjusted net income per share plunged 31% to $0.29.

BJ's Restaurants blamed "severe weather" and "industrywide traffic headwinds," two problems that didn't seem to bother Kona Grill all that much. In fact, Berke Bakay, president and CEO of Kona Grill, mentioned during the company's conference call that growth is coming despite industry trends and "in spite of the severe winter weather." This gave Kona Grill confidence in its brand development, and it's ready to rapidly expand.

Source: Kona Grill

What else Kona's got that BJ's doesn't
Neither chain has a large number of locations on a national scale and both have ample opportunity for growth. Kona Grill claimed in a February presentation that the opportunity is 100-plus locations, or quadruple its current size or more, which is also closer to BJ's Restaurants in size.

Kona's strategy is to build a loyal guest base that comes back frequently for more. It reports that its "heavy guest usage," or guests who frequent nine-plus times during 90 days, is around 17% compared to an industry average of between 10% and 15%.

Its "medium guest usage," or guests who frequent between four and eight times during 90 days, is a whopping 37% compared to a 16% to 30% industry average.

If you do the math, this means more than half the guests at any one time have not only been to Kona Grill before but were there less than two weeks ago. That's a heavy amount of regulars for an upscale full-service casual restaurant.

Finally, guests at Kona Grill like to open their wallets. The average check at Kona Grill is $25 compared to just $14 for BJ's Restaurants. More compelling is that the average check has $7.50 in booze compared to $3.08 for BJ's Restaurants. This more-than-double liquor bill really helps considering how big the profit margin on alcohol is. Perhaps Kona Grill sells higher-priced martinis and wines than a brew house.

Foolish final thoughts
It's hard to make a case that Kona is undervalued based on historical results. However, judging from its growth opportunities, momentum, and individual metrics compared to BJ's Restaurants, it would seem possible that one day Kona Grill could grow big enough to justify a valuation in the future that is at least equal to BJ's Restaurants valuation today. . Even if Kona Grill only grows by half as much as its plans, its powerful loyalty and check profitability from guests leaves considerable upside potential. Kona Grill deserves a closer look by Fools looking for the next high-growth restaurant stock that hasn't priced in  a valuation that matches its long-term future growth plans.

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